Master limited partnerships (MLPs) offer investors big-time yields. Popular MLPs Enterprise Products Partners (EPD +0.11%) and Energy Transfer (ET 0.20%) currently yield 6.7% and 7.4%, respectively. That's several times higher than the S&P 500, which has a 1.1% dividend yield.
MLPs offer investors several other advantages beyond passive income, but they have a major drawback for many investors. These entities send their investors a Schedule K-1 Federal tax form each year instead of a Form 1099-DIV. These forms often don't arrive until March (or later) and can complicate your tax filing. That's why investors who are interested in the income offered by MLPs should check out the Alerian MLP ETF (AMLP +0.89%).
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Drilling down into this oil ETF
The Alerian MLP ETF tracks an index (Alerian MLP Infrastructure Index) composed of more than a dozen energy infrastructure MLPs. As a result, it offers broad diversification across the energy midstream sector:
- Petroleum pipeline transportation: 29.4% of the fund's assets.
- Natural gas pipeline transportation: 24.3%.
- Gas gathering and processing: 21.1%
- Marketing and distribution: 16.9%.
- Liquefied natural gas: 4.5%.
- Gas compression: 3.8%.
The fund collects distributions from MLPs and aggregates them into a single quarterly payment to investors. The ETF has an 8% distribution yield based on payments over the last 12 months.
The Alerian MLP ETF currently charges an expense ratio of 0.85%. While that's higher than many other oil stock ETFs, the cost can be worth it for the tax simplicity this fund offers. The ETF receives and processes all K-1s from the MLPs it holds. It then distributes a single Form 1099 to shareholders. That eliminates the requirement to report K-1 income on your personal income tax return. It also enables you to hold this fund in a tax-deferred retirement account, such as an IRA.
NYSEMKT: AMLP
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All the top MLPs through one simple fund
While the ETF enables you to invest broadly in MLPs, it has greater exposure to the largest companies in the sector. The fund's top holding is Energy Transfer at 12.5% of its assets. The energy giant has a nationwide footprint of midstream assets that support upstream production at the wellhead and downstream utilization, including exports. Its system handles crude oil, natural gas, natural gas liquids (NGLs), and other commodities. About 90% of its earnings come from fee-based sources, providing the MLP with stable cash flow to support its high-yielding distribution.
NYSE: ET
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The ETF also holds units of Enterprise Products Partners, which is its fifth-largest holding at 11.7%. The MLP also operates a diversified portfolio of critical midstream infrastructure. These assets support its ability to increase its cash distribution. Enterprise Products Partners has raised its payout for 27 straight years. With billions of dollars in growth capital projects recently entering commercial service (and more on the way), it should have plenty of fuel to continue increasing its high-yielding payout.
In addition to those large-scale midstream giants, the Alerian MLP ETF also provides exposure to MLPs with more focused business models. For example, its second-largest holding is Plains All American Pipeline (PAA +1.50%) at 12.5% of its assets. This MLP focuses almost exclusively on operating oil pipelines. Plains is in the process of selling its Canadian NGL businesses in a $3.8 billion deal. It has already recycled the expected proceeds into the purchase of the EPIC Crude Oil Pipeline in a two-phase deal for a combined $2.9 billion. These transactions will enhance the sustainability and growth profile of the MLP's 8.7%-yielding distribution.
Investors in the Alerian MLP ETF get to benefit from the income and growth of all these MLPs. This diversification also helps reduce risk, making the distribution payments from this fund more sustainable than those of a single MLP.
A simple way to invest in MLPs
MLPs can be great investments for those seeking to generate passive income. While they can delay and complicate your taxes, that can be worth it for some investors, given the significant distribution income you can earn from these entities.
The Alerian MLP ETF makes it even simpler to invest in income-generating MLPs. It enables you to invest broadly in the group to collect passive income without the hassle of dealing with K-1s. Those features make it a compelling fund for those seeking a high-octane income stream without complicating their taxes.
