When the Alerian MLP Index touched 300.40 yesterday morning, it reached its highest level in over 2 years. But then the buyers went home and the index pulled back to close below 297. However the longer term performance of the index is nothing to be ashamed of. It's almost double the lows recorded one year ago in early March.
Last year, the MLP Index was the best performing sector in the stock market. This year, while other averages are flattish to down a little, the Alerian MLP Index is up 4% and its comparable index with reinvested income is up over 6%. The index advanced to 300.04 on January 20, only to pull back to 270 a few weeks later. Then it rebounded, taking it to what would have been a new high for 2010. Bumping the 300 ceiling twice and then being turned back indicates the index may be settling into a trading range for some time, probably in a 270-300 range. It's entitled to rest after its best advance in history, a record that potentially will last for decades.
The higher index has reduced its yield to only 7.1%. If the index moves up to 343 for a new record, its yield would fall to about 6.1%. The yield, when it reach 342 in July 2007 was 5.37%, only a few basis points above the yield on the 10 year Treasury bond. MLPs are yield instruments. As such, they have limits on how low the yield can fall.
If MLPs tread water while providing a good yield, this would still be a very good year at a time other securities (without high yields) may not do so well. For new readers, if an investor wants to participate in the Alerian MLP Index directly, the closed end fund, JPMorgan Chase Capital XVI JP M (NYSEARCA:AMJ), tracks the index. 10 shares of stock equal the index. The current yield, based on income less expenses, is above 6% and paid with dividends not distributions. Yesterday, the Federal Reserve today reported that banks are not lending money (like they should) to businesses. That may be true, but MLPs are having no difficulty obtaining financing for building more pipelines and related capital expenditures. Last year billions were made available to MLPs for investments and that has continued into this year because the long term fundamentals for building more energy products infrastructure is a high priority in the US.
Disclosure: No position