Why I Wonder If We’re Overlooking AMLP – Is the 8% Dividend Not Flashy Enough?

Many investors are aware of the dangers of chasing returns. Buying a stock or ETF based purely on raw momentum could lead to quick losses once the direction inevitably turns a corner. For income investors, chasing yield doesn’t get as bad a rep as chasing capital gains.

And while there are double-digit percentage yielders out there that can continue to do well, investors must understand what they’re getting into before continuously raising the bar on their portfolio’s yield. Indeed, chasing yield can be quite addictive to those who depend on passive income from investments.

Though I’m not against scrapping the so-called “4% rule” by going for higher yielders, provided one took the time to fully analyze the balance sheet, income statement, and statement of cash flows, I do think that most investors who blindly chase yield could find themselves taking on far more risk than they can handle.

At the end of the day, dividend stability is key for those who want to go for the 8% yielders over the 4% yielders. And in this piece, we’ll check in on a specific ETF that’s quite a rare breed. It has a high yield by design with a respectable share trajectory (an impressive amount of capital gains in recent years) while experiencing less turbulence than the broad market. In many ways, the ETF seems to allow passive income seekers a way to have their cake and eat it, too.

The Alerian ETF has one of the steadier 8% yields out there

Enter shares of Alerian MLP ETF (NYSEARCA:AMLP), which offer a yield that’s just north of the 8% mark. Unlike most other stocks or ETFs that offer such a sky-high yield, AMLP shares aren’t too far away from all-time highs. In fact, shares are just under 7% away from their peak.

And with a 0.80 beta, the name had an easier time navigating through the market’s rougher patches. During the first-half stock market sell-off, AMLP shares plunged by around 15%, quite a bit less than the S&P 500, which found itself within a percentage point of entering a bear market!

Indeed, the AMLP is an intriguing security, to say the least. After more than doubling in the past five years, the ETF certainly stands out as a “sleeper pick” of sorts for self-guided investors who want not just a hefty dividend yield, but solid total returns. In recent years, the AMLP ETF has delivered on both fronts. But can it continue to do so over the next five to ten years? I think it has a good chance of continuing to perform.

For those who aren’t yet familiar with the ETF, it’s a firm that invests in energy infrastructure MLPs (master limited partnerships). Underneath the hood, there are a lot of pipeline plays, many of which offer outsized, but very well-covered dividend yields. In addition to the pipelines, you’ll get energy storage and other utility-like cash flows across the midstream energy scene.

A solid pipeline of yield-heavy pipelines

With a steady history of paying distributions and the cash flow-rich nature of midstream energy, the 8% yield looks quite safe. Many constituents within the ETF, like Energy Transfer (NYSE:ET), offer well-covered yields in the ballpark of 7-9%. And with recent momentum propelling many pipeline stocks, it should be no surprise that AMLP has been such a robust performer of late.

If the energy patch stays robust, the broad midstream scene could see more of the same: dividend growth and capital appreciation. However, it’s not always bright days for the pipelines. There have been dark days in the past, but the good news is that the midstream operators tend to be far less sensitive to energy price fluctuations than the producers themselves.

All considered, investors who are fans of midstream energy plays should give the AMLP a close look. If the energy patch keeps going strong, perhaps many of the MLPs underneath the hood of the ETF may still be underappreciated. As always, do reach out to a financial advisor and ensure your portfolio is well-diversified beyond the energy patch. In short, I view the AMLP as an intriguing ETF for yield seekers who are lacking in exposure to the midstream energy space.

If the yield isn’t flashy enough, perhaps the distribution growth potential is as the pipeline industry shifts into high gear.

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