⚡How AI is Supercharging This 8% Dividend ETF: The AMLP Story

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Hello, fellow ETF enthusiasts! As AI reshapes our economy, certain market segments are gaining momentum, particularly energy infrastructure through Master Limited Partnerships (MLPs).

Today, we’ll focus on the Alerian MLP ETF $AMLP ( ▲ 1.54% ) , an income-focused fund that offers a unique entry into this often-overlooked sector. With AI driving increased demand for power and data, the pipelines and storage assets are more critical than ever. Let’s explore how AMLP fits into a tech-forward investing strategy!

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What is AMLP?

AMLP aims to replicate the price and yield performance of the Alerian MLP Infrastructure Index (AMZI). This index is a composite of energy infrastructure Master Limited Partnerships (MLPs). You can think of this index as a carefully selected collection of companies that own and operate the crucial infrastructure necessary for maintaining America's energy supply. These companies are not oil drilling firms speculating on commodity prices; rather, they function like toll road operators in the energy sector.

A master limited partnership (MLP) is a limited partnership whose interests (known as "units") are traded on public exchanges, just like corporate stock. MLPs are publicly traded limited partnerships that are generally focused on energy infrastructure within the US, including pipelines, storage facilities and processing plants.

Here's why MLPs are so compelling:

• 🪄Tax Advantage Magic: Master Limited Partnerships (MLPs) avoid federal and state corporate income taxes by passing the tax liability to individual partners. To qualify as an MLP, at least 90% of income must come from natural resource-related activities, such as transportation and storage. This structure allows greater cash flow distribution to investors.

• 📈Steady Cash Flow Model: Revenue from midstream infrastructure is based on the volume of oil and gas processed and tends to be insulated from price fluctuations. These companies make money on volume, not commodity prices – they get paid whether oil is $50 or $150 per barrel.

• 🗓️Required Distributions: MLPs have attracted significant interest because required quarterly distributions provide a steady stream of current income, making them particularly attractive for income-focused investors.

The rise of artificial intelligence (AI) is boosting gas pipeline stocks as AI applications, particularly in data centres, require significant electricity. These data centres need substantial computational power for deep learning, leading to a projected increase in U.S. electricity demand by 47% by 2040.

This surge in demand presents an opportunity for master limited partnership (MLP) investors. Power utilities are experienced in building natural gas plants and can efficiently use existing distribution networks supplied by midstream companies. Additionally, conventional natural gas power plants can be constructed in as little as one year, addressing the rapid rise in power consumption.

Investment Strategy📊

• 🛰️Core-Satellite Approach: AMLP works exceptionally well as a satellite holding in a diversified ETF portfolio. Consider allocating 3-7% of your equity exposure to energy infrastructure, using AMLP as your primary vehicle.

• 💸Income-Focused Portfolios: With a dividend yield of approximately 8%, which exceeds the category average, and quarterly distributions, AMLP can serve as a cornerstone holding for investors seeking regular income. The fund's quarterly distribution schedule provides predictable cash flow timing.

  

  AMLP: Reliable 8% Yield for Income Portfolios

• 🔄 Sector Rotation Strategy: Energy infrastructure often performs differently than broader energy sectors, making AMLP useful for tactical allocation adjustments. AMLP has lower volatility than the broader market, which can help mitigate portfolio volatility during energy sector rotations.

• 🛡️Inflation Hedge: Infrastructure assets typically possess some pricing power and can serve as partial inflation protection, making AMLP a valuable investment during inflationary periods.

AMLP at a glance

ETF Issuer: ALPS Advisors

Inception: 2010-08-24

Asset Class: Equity (MLPs)

Underlying Index: Alerian MLP Infrastructure Index

Geographical Focus: U.S.

Expense Ratio: 0.85% (as of last data point)

Dividend Yield: 8.04% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

AMLP's performance story is one of remarkable resilience and recovery. Looking at the historical data:

• Recent Strong Performance: YTD returns show AMLP at 5.38%, with 1-year returns of 10.16%.

• The Recovery Story: After the challenging 2020 period with -32.45% returns, AMLP has shown a strong recovery: 2021 (39.44%), 2022 (25.13%), 2023 (21.37%), and 2024 (22.61%). This ETF shows the ability to rebound from energy sector downturns.

• Long-term Perspective: The 15-year average annual return for AMLP is 4.90%, with the 10-year total return at 51.23%. While not spectacular, these returns become more compelling when combined with the fund's generous distributions.

• Dividend Consistency: The fund has maintained quarterly distributions throughout various market cycles, with recent quarterly payouts around $0.94-$0.95 per share.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Exceptional Income Generation with Growth Potential: In today's environment, finding quality investments yielding nearly 8% is increasingly rare. Unlike many high-yield investments, this income is backed by essential infrastructure assets with growing demand.

2. AI and Data Centre Tailwinds: The AI boom has created an unexpected spike in demand growth for natural gas infrastructure. As hyperscalers prioritise reliability and scalability for their data centre buildouts, midstream firms have increasingly cited short laterals connecting to existing pipelines as a cost-effective and easy-to-deploy strategy for meeting new demand.

3. Tax-Efficient Structure Within an ETF Wrapper: While direct MLP investment creates K-1 tax complications, the Alerian MLP ETF distributes a single Form 1099 to its shareholders. You get MLP exposure without the tax headaches, though you sacrifice some tax benefits.

Top 3 Reasons Not to Invest

1. Sector Concentration Risk: The ETF invests primarily in a particular sector and could experience greater volatility than a fund investing in a broader range of industries. Energy represents the majority of the portfolio, creating significant sector concentration risk.

2. Regulatory and Environmental Policy Risks: Investments in the energy infrastructure sector are subject to reduced volumes of natural gas or other energy commodities available for transportation, processing, or storage, as well as changes in the regulatory environment, extreme weather, and rising interest rates. Environmental regulations and policy shifts toward renewables pose long-term headwinds.

3. Interest Rate Sensitivity and High Fees: The ETF carries an expense ratio of 0.85%, which is relatively high for ETFs. Additionally, as income-focused investments, MLPs can be sensitive to interest rate changes, potentially underperforming when rates rise rapidly.

🏗️The Hidden Infrastructure Play Behind the AI Boom

The Alerian MLP ETF is an attractive option for investors seeking income, diversification, and exposure to vital energy infrastructure benefiting from AI-driven demand growth. AMLP is worth considering for a well-diversified portfolio.

However, investors should note potential drawbacks, including sector concentration, regulatory risks, and high fees. It may be better to view AMLP as a satellite investment rather than a core holding, ensuring it aligns with your risk tolerance and income goals.

The blend of traditional energy infrastructure and advancing AI technology creates an interesting investment thesis. As energy demand rises alongside data center growth, investing in energy infrastructure could be a smart move for income-focused investors.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.