Generate High Income From Energy MLPs Via This Active ETF

Crude oil prices soared from less than $80 to more than $130 during the first quarter of 2022. While prices have fallen back to around $75 during the second half of the year, midstream MLPs are less sensitive to changes in commodity prices because they generate stable fee-based revenue from transportation and storage over long timeframes.

In addition to a 20%+ improvement in stock price, midstream MLPs pay out most of their income as dividends, with yields over 7% annually. These yields are more attractive than the S&P 500 index’s roughly 1.7% dividend yield and the 4.2% and 5.9% yields of real estate investment trusts (REITs) and investment-grade bonds, respectively.

 

Source: GlobalX

Finally, despite their increase in value, midstream MLPs continue to have a more attractive valuation than other popular sources of dividend income, such as REITs and utilities. MLPs have a five-year EV/EBITDA valuation of well under 10x, compared to nearly 14x for utilities and nearly 20x for REITs, meaning they could have a strong downside buffer.

The InfraCap MLP ETF (AMZA) holds a portfolio of 25 to 35 midstream MLPs, including publicly-traded limited partnerships, limited liability companies taxed as partnerships, and related general partners. The fund’s 1.4% total expense ratio makes it pricier than passive MLP ETFs, but active management could pay off in today’s market.

Using security-level fundamental and technical analysis, the fund managers select securities and weigh them while using opportunistic short positions as an interest rate or oil price hedge. The team also employs modest 20% to 30% leverage to enhance beta and may use options strategies to provide additional income.

 

Source: Barchart.com

Several of the fund’s top holdings have recently seen strong Q3 earnings boost their performance. For example, Energy Transfer LP (ET) (19.66%), MPLX LP (MPLX) (15.92%), and Magellan Midstream Partners LP (MMP) (12.15%) all reported solid Q3 results and have risen 39.9%, 10.6%, and 10.2% since January, respectively.

Don’t forget to check our Best Energy Dividend Stocks List to explore some of the top performing MLPs.

Oil and gas prices have fallen from their highs earlier this year, but midstream MLPs still look strong moving into Q1 2024. While they typically underperform during rising-rate environments, since they depend on debt to finance new projects, existing operations are usually funded with fixed interest rates, limiting exposure to variable interest rates.

At the same time, attractive relative valuations could limit downside risk, while exceptional yields could drive investment as the economy continues to deteriorate. As a result, investors may want to consider The InfraCap MLP ETF (AMZA) or other MLP-focused ETFs for their portfolios to mitigate downside risk and generate income.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.