For dividend investors, an excellent yield combined with regular dividend increases is the holy grail of wealth building. Dividend growth produces share price appreciation, so an income investment that grows dividends will almost certainly produce tremendous compounding annual total returns.
Today, I want to show you my favorite ETF that does just that.
In January 2023, the InfraCap MLP ETF (AMZA) increased its dividend by 9.1%—its first increase since the pandemic forced a deep dividend cut. As we went through 2023, I told my Dividend Hunter subscribers to expect another 8% to 9% dividend increase in 2024, and on January 24, the folks at InfraCap announced the 2024 dividend, which included an 8.3% increase. Nice!
AMZA pays stable monthly dividends and, if this trend continues, will be announcing a new higher rate each January going forward.
As the name states, AMZA invests in energy sector master limited partnerships (MLPs). Over the last seven years, the use of the MLP structure has decreased, and the number of energy midstream corporations has become the majority of companies in the sector.
The MLP group is now concentrated into a handful of companies. The good news is that these are very well run, with businesses that generate a lot of growing free cashflow. AMZA’s top five holdings account for 79% of the fund’s assets. Each company is an MLP I would happily own as an individual stock.
Investors tend to steer clear of MLPs because of the tax reporting issues: an MLP investor receives a Schedule K-1 for tax reporting as a limited partner, requiring much more work on your tax return than reporting Forms 1099. And owning K-1 investments in a qualified plan such as an IRA can cause massive tax problems.
Investing in AMZA eliminates the K-1 challenge. AMZA sends investors a Form 1099 for tax reporting, making the ETF safe to own in your IRA. The fund also passes through the tax advantages of investing in MLPs.
Since the end of 2020, AMZA has returned 137% to investors. While I don’t expect 33% annual returns in the future, the current 8% yield combined with high single-digit annual dividend growth means investors can expect close to 20% on average annual returns going forward.