The rise over the last ~2 years in MLPs (Master Limited Partnerships) has pushed their yield down to 6.05% from over 12%. With a yield so far below average, it seems reasonable to suppose that future returns will be below average.
To get a feeling for what to expect over the next several years, I plugged the numbers into the equation on the Hussman Funds website for calculating future return estimates.
- Total annual return = (1+g)(Yoriginal/Yterminal)^(1/T) - 1 + (Yoriginal+Yterminal)/2
g = growth rate of dividends
Yoriginal = current dividend yield
Yterminal = ending dividend yield
T = time frame
The growth rate of MLP dividends has been around 6.25% since 1996. Given that this period has been very good for MLPs, I'm not sure that this rate is sustainable through the next several years. Nevertheless, since I don't have any evidence that the growth rate is slowing down, I'm using the 6.25% growth rate.
For the ending dividend yield, I am using the historical average yield of 7.82%. While one could argue that the recent bunch of MLP ETN and ETF launches will cause the dividend yield's average level to remain permanently lower, again, there is no evidence that this is the case.
The result of the above calculation using a 7 year time frame, is an estimate of 9.35% annual returns. While this is not great compared to the 15%+ returns of the last several years, when applying a similar calculation to stocks, we get a result of only 2.42%.
So despite their lower then average yield, MLPs still look likely to outperform stocks over the next few years. The fact that bond yields are at very low levels only adds to the relative attractiveness of MLPs.
Several ETNs through which investors can gain access to MLPs are the JPMorgan Alerian MLP Index ETN (AMJ), UBS E-TRACS Alerian MLP Infrastructure (MLPI), or the Credit Suisse Cushing 30 MLP ETN (MLPN).
Due to tax implications, investors looking to buy individual MLPs should check with their tax advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.