MLP Yields Blew Away Yields For 10-Year Treasuries, Baa Bonds, And REITs Over 15 Years

Includes: EEP, EPD, ETP, FEN, FIF, KMP
by: Richard Shaw

MLP dividend growth has blown away dividend growth by REITs, utilities and the S&P 500 from 1996 through 2011.

That fact is nicely illustrated by Figure 1, which is a chart from a presentation book from Energy Income Partners (, which manages two closed end funds for First Trust ( -- FEN (Energy Income and Growth) and FIF (First Trust Energy Infrastructure Fund).

Figure 1:

Figure 2:

That same presentation book gave of view of the yields on the Alerian MLP index yield versus the yield of the 10-year U.S. Treasury bond.

You can see that when market decline, the spread increases, which is typical of what happens to yielding equities if their dividend payments hold up during the market decline, as they did generally for MLPs.

Figures 3, 4 and 5 from that presentation book show the historical point spread between the MLP index yield and 10-year Treasuries, Baa corporate bonds, and REITs (presumably equity REITS).

In each case the spread is above average, which Energy Income Partners suggests is a sign of undervaluation of the MLPs.

We agree with that logic generally, but are concerned for all yielding investments that they might be a bit expensive versus future interest rates that simply must rise. That, however, is more of a short-term effect, because operating companies often have ways to increase revenues when inflation or interest rates rise. A nice thing about MLPs is that some portion of their contracts have escalators in their rates that tend to counteract interest rate increases.

Figure 3: Yield Spread -- MLPs vs 10-year Treasuries:

Figure 4: Yield Spread -- MLPs vs Baa Corporate Bonds:

Figure 5: Yield Spread -- MLPs vs REITs:

Figure 6: Single MLP Dividend Stream Example:

That smooth rising dividend stream from MLPs for the index, was not available from every MLP, but some paid in a growing stream like clockwork.

The chart from 1993 for KMP (indexed to a value of 100 for 1993), shows a very nice smooth, rising income ride (black line). It also shows a plot of the high and low price for each calendar year (green for high and red for low). They tripled in the same time period, but the income reach about nine times the beginning level.

Figure 7: Yields Fluctuated Greatly:

Even though the distribution stream was smooth and rising, don't confuse that with yield. Since yield is distribution divided by price, and since prices fluctuated a lot, the yield gyrated.

Knowing that effect with MLPs, and other dividend assets with steady payment growth, can be a helpful signal of bargains when they abound. There were historic opportunities in 2001-2002 as well as 2008-2009 to lock in tremendous yields (as was the case with some other dividend equity categories).

Remember, don't confuse income streams with yields -- prices fluctuate causing yields to fluctuate even when distributions do not.

Figure 8: More Granular View Of Fluctuations In Prices, Distributions and Yields:

Figure 9: Revenues and Price/Sales Ratios Also Fluctuate Much More than Yields:

Figure 10: Some MLPs Have Very Steady Income Streams:

EPD is a good example of an MLP that has had a dependable flow of distributions.

EPD Chart

Figure 11: Some MLPs Increase Dividends But With Periods of No Growth:

EEP is an example of an MLP that has been increasing its distribution, but sometimes as an owner you had to wait a few years to get a raise.

EEP Chart

Figure 12: Some MLPs Fail to Provide Steady Distributions:

ETP is an example of an MLP that would have been frustrating to hold as an individual security for someone relying on distributions to buy groceries and pay the mortgage.

ETP Chart

Figure 1 shows the great income feature of MLPs for those investors needing to generate above average income.

Figures 3-5 suggest that relative to other income producing assets, MLPs are not yet expensive - although we are concerned that "financial repression" may be making many income vehicles somewhat expensive versus future interest rates.

Figure 6-9 seek to show stead distributions as the port in the storm of volatile prices and operations.

Figures 10, 11 and 12 illustrate the importance of careful selection to be relatively certain that income streams will be steady and rising; and also to the need to switch out and substitute when MLPs disappoint on the income side. You can't control the price, and need to accept price volatility, but you don't need to accept income volatility.

We see MLPs as national strategic infrastructure that in one form or another (individual MLPs, ETFs, CEFs, or ETNs) are an essential part of any equity income oriented portfolio.

Disclosure: QVM has no positions in any mentioned security as of the creation date of this article (May 10, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.