Alerian MLP ETF (AMLP) is one of the most popular investment vehicles among dividend lovers. This ETF offers a diversified exposure to several stocks within the master limited partnership space. As Morningstar suggests:
Investors purchasing this exchange-traded fund receive exposure to publicly traded partnership units called master limited partnerships whose business operations are concentrated in the transportation of petroleum liquids, such as gasoline and oil, and natural gas.
The Alerian MLP invests almost entirely in the midstream energy transporters. While these companies are listed as energy-related businesses, their exposure to commodity prices is much lower than other energy companies. Marginal changes in oil and gas prices do not directly affect these companies. Most MLPs operate as pipeline operators, which transport natural gas, oil, and similar liquids to terminals located near residential, industrial or commercial customers. Since they primarily act as transport agencies, they are less likely to be affected from the volatility in commodity prices.
The Alerian MLP ETF closely tracks the price and yield performance of the Alerian MLP infrastructure index, and it currently offers a yield of 6.01%. The fund's top holdings are Kinder Morgan Energy Partners (KMP) and Enterprise Products Partners (EPD). Both KMP and EPD are pipeline operators. They offer substantial yields of 4.9%, and 5.6%, respectively. Interestingly while Alerian MLP returned 1.4% in this year, Enterprise Product Partners and Kinder Morgan returned -1.5% and 10.7%, respectively. Fellow Seeking Alpha contributor, Ron Rowland, points out the tax-related issues as the primary reason for the fund's underperformance. I think he has a good point. While master limited partnerships are subject to favorable tax rules, the Alerian MLP ETF is not treated as such. As the fund's prospectus suggests:
As a partnership, an MLP has no federal income tax liability at the entity level. Therefore, treatment of one or more MLPs as a corporation for federal income tax purposes could affect the Fund's ability to meet its investment objective and would reduce the amount of cash available to pay or distribute to you.
As the prospectus suggests, Alerian MLP ETF returned 19.58% since its inception (until the end of last year), whereas the benchmark Alerian MLP Infrastructure Index returned 32.78% in the same period. Reasons for this fund's underperformance are worth to investigate further, but that is beyond the subject of this article.
I am not a big fan of ETFs anyways. ETFs aim to offer a diversified portfolio for lower risk. I think any well-informed investors should be able to create a diversified portfolio from individual stocks. Since most AMLP investors like this fund due to its yield, I suggest investors to focus on the top 10 yielders in this ETF. Following is a list of the top 10 dividend stocks in the Alerian MLP ETF. I also listed their year-to-date performance, dividend yields, and debt-to-equity ratios for your convenience:
Boardwalk Pipeline Partners
Energy Transfer Partners
Regency Energy Partners
Enbridge Energy Partners
As one can easily observe from the table above, the top 10 dividend stocks in the Alerian MLP Index ETF offer an average yield of 7.41%. The lowest yielder is Copano Energy. However, even the lowest dividend payer in the above list offers a higher yield than the Alerian MLP ETF. Exterran Partners is the highest yielder with a yield of 8.99%.
The debt-to-equity ratio is also another important indicator. When comparing master limited partnerships with each other this ratio serves an important purpose. It shows the relative exposure of each company to debt-based leverage. The lower this ratio, the safer is the dividend. Risk adverse investors should prefer companies with low debt-to-equity ratios. The MLPs in the above list support an average debt/equity ratio of 0.99. For comparison, the two largest holdings in the Alerian ETF, Kinder Morgan Energy Partners and Enterprise Partners have debt/equity ratios of 1.5 and 1.3.
I am a big of dividend paying stocks and MLPs are among the top dividend payers in the market. MLPs have a lot of assets that are subject to significant depreciation charges. The depreciation expenses reduce their earnings on the balance sheet, with no real effect on the cash flow generated by the company. The distributions can also be counted as capital expenditures. That creates a significant tax advantage over other companies. Unfortunately, Alerian MLP ETF cannot benefit from this advantage. Therefore, investors looking for a better deal, should instead invest in individual stocks within this ETF. The list above can serve as a good starting point for yield-oriented investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.