Why You Should Consider MLPs for Your Income Portfolio


  • In a sea of income investment options, MLPs could be easily overlooked despite generous yields and tailwinds from free cash flow generation.
  • Stable cash flows and special tax treatment have allowed MLPs to historically pay generous distributions (dividends).
  • Significant changes to capital allocation over the years, free cash flow generation, and a greater focus on sustainable distribution growth can add to investors’ confidence in MLP payouts going forward.

Income investors have an overwhelming number of investment options today. The menu ranges from traditional fixed income to equity investments like REITs to innovative covered call ETFs to more exotic vehicles. Master limited partnerships (MLPs) are known for their potential to provide tax-advantaged income. But they have also generated attractive total returns in recent years. Despite positive fundamentals driven by solid free cash flow generation, MLPs may be overlooked by investors given so many income investment options. This note explains why MLPs are able to provide generous yields and why investors can be confident in MLP payouts going forward.

Understanding MLP Yields

MLPs enjoy special tax treatment by nature of their involvement with natural resources. Though there are other kinds of MLPs, investment products tend to focus on energy infrastructure (or midstream) MLPs. These companies generally transport, store, and process hydrocarbons for fees. While midstream is a subsector of energy, it is unique within energy due to its fee-based business models. Midstream companies generate stable, predictable cash flows, and as such, most companies provide annual EBITDA guidance that is largely independent of commodity prices.

Stable cash flows and special tax treatment have allowed MLPs to historically pay generous distributions. These distributions are often tax-deferred, adding to the appeal of MLPs (read more). The chart below compares the yield for the Alerian MLP Infrastructure Index (AMZI) and the Bloomberg US Aggregate Bond Index (LBUSTRUU). To be clear, MLPs are not a bond substitute. And as equities within the energy sector, MLPs have a different risk profile than corporate bonds. Rather, the corporate bond benchmark is used as a comparison for its familiarity. The chart also highlights the contrasting nature of MLP yields and bond yields, which fluctuate with interest rate levels.

MLPs Have Consistently Offered Higher Yields Than Bonds