With interest rates low, some income investors may want to revisit high-yield master limited partnerships and the related exchange traded funds, such as the Alerian MLP ETF (NYSE:AMLP).
AMLP certainly makes good on the income front with a dividend yield of 9.24%. However, there is more to the fund's story. Another reason to consider AMLP is that components in the e Alerian MLP Infrastructure Index (AMZI), the fund's underlying index, are eliminating incentive distribution rights (IDRs).
In bygone eras of MLP practices, IDRs were used to incentivize the general partner (GP) to boost the limited partner's distributions “by entitling GPs to receive a higher percentage (generally up to 50%) of incremental cash distributions when the distribution to LP unitholders reaches certain thresholds,” according to Alerian.
Why It's Important
Eventually, IDRs ended up becoming a financial burden for MLPs as the rights led to increased cost of capital. In other words, it's good for investors that AMLP member firms are doing away with IDRs.
EQM and PSXP combine for 8.47% of AMLP's roster. Noble Midstream Partners LP (NYSE:NBLX), a smaller AMLP constituent, eliminated its IDR earlier this quarter. DCP Midstream (NYSE:DCP), 3.30% of AMLP's weight, did the same thing.
What's Next
It's likely other AMLP components will get in on the IDR elimination game. After all, it makes financial sense for the companies and their investors.
“Alongside the benefits of a lower cost of capital for the MLP and improved corporate governance, the IDR transactions themselves have also been mostly attractive to unitholders,” notes Alerian.
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