Over the last decade, the master limited partnership (MLP) sector has undergone a deep, multi-year downturn and then a massive recovery.

After all that volatility, you might wonder if the sector’s high yields are worth it.

Let me show you where I see MLPs going from here…

The Downturn

From mid-2014 until January 2016, crude oil crashed from around $100 per barrel to less than $30. The Alerian MLP Index dropped by more than 60% during the same period. The crash blew up the MLP business model of growth, paid for with new debt and equity. Before the crash, MLPs paid out almost all of their free cash flow as distributions to investors.

The decline for MLPs continued as the companies restructured their businesses for lower growth. By the end of 2019, the financial picture for the sector was much improved. Then, in March 2020, the pandemic triggered a crash for all high-yield investment categories, and MLPs dropped by more than 60% in a matter of weeks. From the 2014 peak to the March 2020 trough, the MLP Index declined by 85%.

The Recovery

In hindsight, the low prices of MLPs during the Spring of 2020 were a tremendous buying opportunity. The pandemic-triggered market crash took down all high-yield sectors by 50% to 80%. Investors who jumped on REITs, BDCs, preferred stocks, closed-end funds, and MLPs realized tremendous gains over the next few years.

In my Dividend Hunter service, I have long recommended the InfraCap MLP ETF (AMZA) as the best way to invest in the MLP sector. During the energy sector downturn, the ETF was not immune and fell with the rest of the sector. Today, I want to highlight how AMZA has performed since the 2020 sector crash.

From April 1, 2020, through July 26, 2023, AMZA posted a total return of 311%, giving a 53.1% average annual return. If dividends were reinvested, the total return jumps to an annual rate of 59.6%, or a total return of 372%.

Obviously, jumping on AMZA during the dark days of 2020 paid off, but my time machine is broken, so what are our prospects going forward?

AMZA has managed to pay stable monthly dividends, with a current yield of 8.2%. The yield itself is an excellent reason to consider the fund. The MLP sector consolidated free cash flow for the last few years to increase distribution coverage. Dividend growth slowed to a crawl for 2020 through 2022. Recently companies in the sector returned to meaningful dividend increases. For example, in January, Plains All American Pipelines LP (PAA) increased its payout by 23%. The company also committed to double-digit dividend growth until the payout at least doubles.

In January, AMZA increased its dividend by 9%. I think this level of growth can be sustained for at least the next several years. So, while the big gains in MLPs for the last few years won’t repeat, investors can count on the sector for high yields combined with high single-digit dividend growth. That is a formula for mid-teens compounding annual total returns.