Retirees Chasing AMLP's 7.9% Distribution Should Know About The Coverage Gap Risk

Core Viewpoint - The Alerian MLP ETF (AMLP) offers a 7.9% yield through investments in energy infrastructure, but there are concerns regarding the sustainability of its distributions due to coverage gaps in some of its key holdings [1]. Group 1: Fund Overview - AMLP yields 7.9% from energy infrastructure investments, with the top six holdings accounting for 77% of its assets [1]. - The fund has increased distributions significantly due to rising natural gas demand and higher utilization rates of pipeline operators post-pandemic [1]. Group 2: Income Generation - AMLP invests in master limited partnerships (MLPs) that own pipelines, storage facilities, and processing plants, generating predictable cash flows to support quarterly distributions [1]. - The fund has a 0.85% expense ratio, which is deducted from the distributions passed to shareholders [1]. Group 3: Distribution Safety - The top three MLPs—Energy Transfer, Enterprise Products Partners, and MPLX—account for 38% of the portfolio, making their distribution sustainability critical [1]. - Energy Transfer has strong coverage with $11.5 billion in operating cash flow supporting its $1.32 annual distribution, while MPLX generates $5.9 billion in operating cash flow against a $3.6 billion distribution requirement [1]. - Enterprise Products Partners has a concerning coverage gap, distributing $4.5 billion while generating only $3.6 billion in free cash flow, indicating potential future distribution pressures [1]. Group 4: Total Return Considerations - AMLP has shown strong total returns as energy infrastructure rebounded from underinvestment, reflecting stable cash flows despite commodity price volatility [1]. - The current rally may limit upside potential for new investors at existing levels [1]. Group 5: Conclusion - AMLP's 7.9% yield presents both opportunities and risks, with steady distribution growth from 2021 to 2025, but concerns over Enterprise Products Partners' coverage gap could impact overall income stability [1].