Many investors use MLPs on an ad hoc basis in their search for income. However, energy infrastructure MLP distribution growth has contributed more to MLP total returns than the frequently cited MLP yield.

During the past 10 years, the Alerian MLP Infrastructure Index (AMZI) has generated 17% in total returns. Of this, 7% was attributable to yield, 8% to distribution growth and 2% to multiple expansions.

Successful MLPs are able to grow their distributions quarter after quarter regardless of the broader macro environment. Energy infrastructure MLP distributions have grown on average 8% over the past 10 years, almost twice as fast as the broader economy’s 4% growth.

During the 2005 to 2008 time period, average distribution growth rates of 9% to 13% were driven by the number of MLPs that completed their IPOs in that time frame. Smaller companies have a relatively easier time achieving above-average growth because they have a smaller asset base (and cash flow stream) off which to build. A $100 million acquisition for a $500 million MLP represents significant growth, whereas a $30 billion MLP making that same acquisition would not see much impact at all.

During the financial crisis, through conservative stewardship of capital, most MLPs were able to maintain or grow their distributions even when the U.S. economy, as measured by GDP, shrank considerably. Overall, a rising tide lifts all boats, and while MLPs are able to grow their distributions despite broader weakness in the economy, the greatest growth occurs when the country does well as a whole.

The table below shows annual AMZI distribution growth and annual GDP growth amounts. In addition, it provides an example of how $5 in income would have grown over the past 10 years, based on whether it grew at the same pace as AMZI distributions, or at the pace of GDP. Cumulatively, energy infrastructure MLP distributions have increased 114% in the past 10 years, vs. cumulative GDP growth of 46%.

Looking forward, industry analysts generally expect 4% to 6% baseline distribution growth for midstream MLPs, anchored by increasing inflation-adjusted tariffs and the backlog of organic construction projects coming online. Acquisitions, depending on magnitude and frequency, can enhance these distribution growth payouts.

Because MLPs offer both yield and growth, they appeal to a wide variety of investors and can nicely supplement a fixed income or equity growth portfolio.

Maria Halmo and Emily Hsieh, CPA, are directors for Alerian, an independent provider of MLP and energy infrastructure market intelligence. Over $19 billion is directly tied to the Alerian Index Series. For more information, please visit www.alerian.com.

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