Midstream energy stocks have become favorites for many income investors. That makes sense, considering the juicy yields that these stocks often offer.
However, many midstream companies are organized as master limited partnerships (MLPs), which entail tax complications. It's also sometimes challenging to select the best midstream stocks to buy.
The Alerian MLP ETF (AMLP +0.24%) addresses both issues. This exchange-traded fund (ETF) owns 13 midstream MLP stocks but isn't an MLP itself.
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An outstanding distribution
The Alerian MLP ETF's 30-day SEC yield is 8.1%. Over the last 12 months, the ETF's distribution yield has been a hair below 8%. Importantly, the fund can pay attractive distributions without leverage.
It's easy to see why the Alerian MLP ETF offers such an ultra-high yield. The MLP stocks that it owns all pay significant distributions.
For example, the ETF's top holding, Plains All American Pipeline LP (PAA +0.42%), has a distribution yield of 8.7%. Western Midstream Partners LP (WES +0.80%) is Alerian's second-largest holding and offers a distribution yield of nearly 8.9%.
The average yield for the Alerian MLP ETF since its inception in August 2010 is over 6.6%. The ETF has paid a distribution for 61 consecutive quarters.
Granted, the Alerian MLP ETF's annual expense ratio of 0.85% is higher than what you'd pay with most index ETFs. However, the fund's distributions easily offset this downside.
NYSEMKT: AMLP
Key Data Points
Poised for growth
Over the last five years, the Alerican MLP ETF has delivered an impressive annualized total return of 25.7%. I wouldn't bank on those levels of returns over the next few years. However, this ETF appears to be poised for growth in 2026 and beyond.
One key growth driver for the MLPs in Alerian's portfolio is the boom in data center construction. As a case in point, Energy Transfer LP (ET +2.27%), which makes up roughly 12% of the ETF's portfolio, signed agreements last year to provide natural gas to data centers operated by CloudBurst, Oracle (ORCL +2.97%), and Fermi (FRMI +1.83%) America.
Other midstream companies among Alerian's holdings are also investing heavily to capitalize on these opportunities. For example, Enterprise Products Partners LP (EPD +0.88%), which accounts for roughly 11.6% of the ETF's portfolio, has $5.1 billion in capital projects under construction. Enterprise said in its latest investor presentation that liquid natural gas (LNG) and artificial intelligence (AI) are "driving major U.S. natural gas demand increase over the next five years."
Investors don't have to forfeit growth to obtain solid income. The Alerian MLP ETF proves the point.
