The Impact Of Midstream MLPs On An Income Generating Portfolio

Dividend Assets Capital (“DAC”) has been an investor in energy infrastructure, particularly midstream Master Limited Partnerships (“MLPs”), since their beginning.  Midstream MLPs are involved in the transportation, processing and storage of oil, natural gas and their liquids. They typically operate fee-based business models by entering long-term contracts with their customers and reward their investors with attractive and consistent distribution yields, especially in low-interest-rate environments.

Historically, midstream MLPs have had a meaningful impact on investment portfolios designed to generate income. To demonstrate this impact, DAC has analyzed and compared four investment portfolios with a variety of investment allocations:

Core PortfolioCore Portfolio plusMidstream MLPsCore Portfolio plusHigh Yield (HY) BondsCore Portfolio plusReal Estate Investment Trusts
Allocation1:60% S&P 500® Index40% Bloomberg Barclays US Agg IndexAllocation1:60% S&P 500® Index20% BB US Agg Index20% Alerian MLP IndexAllocation1:60% S&P 500® Index20% BB US Agg Index20% BB US Corp HY IndexAllocation1:60% S&P 500® Index20% BB US Agg Index20% FTSE Equity REIT Index

The analysis assumed a theoretical investment portfolio of $1 million on 12/31/2007. Beginning on 12/31/2008, we applied an annual withdrawal of $60,000 (6% of initial investment) taken at the end of each year through 12/31/2022 and increased the withdrawal over time with a 3.0% annual inflation rate. Total withdrawals for the period amounted to $1,115,935. Below is the summary of portfolio results:

Core Portfolio 

Year EndPortfolio Value2Portfolio YieldPortfolio Return
2007$1,000,000  
2008$738,9744.72%-20.10%
2009$791,6412.76%15.49%
2010$814,1832.34%10.89%
2011$787,8102.25%4.81%
2012$800,8231.96%10.22%
2013$861,5652.02%16.27%
2014$881,8082.02%10.67%
2015$817,4802.49%1.07%
2016$811,2822.30%8.54%
2017$859,3712.05%15.58%
2018$752,2882.84%-3.08%
2019$855,2381.73%24.73%
2020$904,1301.38%15.72%
2021$1,016,6931.22%22.20%
2022$749,8603.00%-17.32%

Core Portfolio + Midstream MLPs (20%)

Year EndPortfolio Value2Withdrawal3Portfolio YieldPortfolio Return
2007$1,000,000   
2008$654,665$60,0007.35%-28.53%
2009$776,259$61,8002.78%28.01%
2010$847,317$63,6542.73%17.35%
2011$835,322$65,5643.08%6.32%
2012$853,759$67,5313.07%10.29%
2013$983,674$69,5562.56%23.36%
2014$1,011,479$71,6432.89%10.11%
2015$871,792$73,7924.24%-6.51%
2016$892,896$76,0062.86%11.14%
2017$943,512$78,2862.76%14.44%
2018$819,580$80,6353.53%-4.59%
2019$947,162$83,0542.19%25.70%
2020$995,354$85,5462.05%14.12%
2021$1,158,645$88,1121.26%25.26%
2022$869,395$90,7552.77%-17.13%

Core Portfolio + High Yield Bonds (20%)

Year EndPortfolio Value2Withdrawal3Portfolio YieldPortfolio Return
2007$1,000,000   
2008$676,183$60,0009.72%-26.38%
2009$786,427$61,8003.20%25.44%
2010$824,209$63,6543.13%12.90%
2011$792,158$65,5643.50%4.07%
2012$827,048$67,5312.72%12.93%
2013$918,200$69,5562.46%19.43%
2014$941,716$71,6432.69%10.36%
2015$871,772$73,7923.40%0.41%
2016$889,933$76,0062.62%10.80%
2017$962,117$78,2862.30%16.91%
2018$847,966$80,6353.30%-3.48%
2019$988,898$83,0541.88%26.41%
2020$1,063,522$85,5461.58%16.20%
2021$1,230,273$88,1121.29%23.96%
2022$925,065$90,7553.02%-17.43%

Core Portfolio + REITs (20%)

Year EndPortfolio Value2Withdrawal3Portfolio YieldPortfolio Return
2007$1,000,000    
2008$653,039 $60,0006.52%-28.70%
2009$724,804 $61,8002.61%20.45%
2010$769,446 $63,6542.32%14.94%
2011$739,974 $65,5642.53%4.69%
2012$773,144 $67,5312.24%13.61%
2013$843,952 $69,5562.22%18.16%
2014$894,875 $71,6432.16%14.52%
2015$834,454 $73,7922.75%1.49%
2016$838,956 $76,0062.60%9.65%
2017$898,401 $78,2862.24%16.42%
2018$784,637 $80,6353.06%-3.69%
2019$918,902 $83,0541.85%27.70%
2020$958,252 $85,5461.74%13.59%
2021$1,128,008 $88,1121.25%26.91%
2022$827,758 $90,7553.13%-18.57%

In recent years, there has been significant price volatility in midstream MLPs. In 2021 and 2022, valuations on many midstream MLPs rebound meaningfully from record lows in 2020. However, the durable and relatively high income produced by midstream MLPs has been a consistent benefit for MLP investors through the years. As you can see, from the results of our analysis, all portfolios would maintain an adequate value to generate increasing income over the last 15 years. However, due to higher investment income, the portfolio with an allocation to MLPs produced the second highest principal value at the end of the period.

The bottom line, despite their price volatility, incorporating midstream MLPs into an investment portfolio may help investors achieve their income needs while continuing to produce asset growth that has often been more favorable than other traditional income-oriented investments.


Sources: Bloomberg, Dividend Assets Capital 12/31/2022

1The S&P 500® Index was used as a proxy for an investment portfolio of large cap, U.S. growth stocks that may or may not pay dividends. The Bloomberg Barclays US Agg Index was used as a proxy for an investment portfolio of intermediate term investment grade bonds traded in the United States. The Alerian MLP Index was used as a proxy for a diversified investment portfolio of midstream energy MLPs. The Bloomberg Barclays US Corporate High Yield Index was used as a proxy for a diversified investment portfolio of non-investment grade corporate bonds traded in the United States. The FTSE NAREIT Equity REIT Index was used as a proxy for a diversified investment portfolio of US equity Real Estate Investment Trusts.
2Portfolio value after the withdrawal was made.
3The withdrawal amount is a combination of investment income and return of principal.

Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. It is not possible to invest in an index. This information is for illustrative purposes. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing. Dividend Assets Capital, LLC (“DAC”) is an investment adviser registered with the U.S. Securities and Exchange Commission. The Firm’s Investment Adviser Brochure, Form ADV Part 2, contains this and other information about the Firm, and should be read carefully before investing. You may obtain a current copy of DAC’s Form ADV Part 2 by visiting our website at www.dacapitalsc.com, emailing info@dacapitalsc.com, or by calling us at (866) 348-4769. Additional information about Dividend Assets Capital, LLC is also available on the United States Securities and Exchange Commission’s website at www.advisorinfo.sec.gov. You may search this site using a unique identifying number known as a CRD. DAC’s CRD is 129973. Registration does not imply a certain level of skill or training. DAC-23-023.

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