Why MLP Distribution Coverage Is Telling a Much Stronger Story Than Before

MLP investors are witnessing a remarkable turnaround in distribution coverage metrics. The Alerian MLP Infrastructure Index (AMZI) has seen average distribution coverage surge from 1.4x in 2018 to 2.3x in 2022—a striking improvement that reflects fundamental shifts in how midstream companies operate.

What Changed in the MLP Landscape?

Distribution coverage, which measures how well MLPs can afford their payouts by comparing distributable cash flow (DCF) to total distributions, used to be the headline metric investors obsessed over. Today, it’s just one piece of a much larger puzzle.

The turning point came around 2020. When pandemic-related uncertainty hit hard, some companies made tough calls and cut distributions. But here’s what happened after: instead of sliding deeper, the MLP space pivoted. Free cash flow generation became robust. Multiple names began buyback programs—clear proof of excess cash sitting on balance sheets. Capital projects that started pre-pandemic and post-pandemic came online, boosting cash generation further.

The result? Financial flexibility improved dramatically. Balance sheets strengthened. And crucially, MLPs achieved six consecutive quarters without a distribution cut across the midstream universe. That track record alone gives investors confidence that payouts are now on solid ground.

The Numbers Tell the Real Story

Constituents that grew distributions from 2018 to 2022 despite pandemic volatility include some heavy hitters: Enterprise Products Partners (EPD), MPLX, Magellan Midstream Partners (MMP), and others. What’s remarkable is that many of these names actually improved their coverage ratios even while increasing payouts—a feat that signals genuine underlying strength.

Meanwhile, some companies like Western Midstream (WES) have moved away from DCF reporting entirely, choosing instead to focus on widely-understood metrics like free cash flow. This shift itself signals confidence. Why focus on legacy metrics when the broader financial picture is this healthy?

Cheniere Energy Partners (CQP) even introduced a variable distribution component tied to financial performance, another indicator that the space has moved beyond simply maintaining fixed payouts.

Why This Matters for the AMZI Yield

The current AMZI yield of 8.1% sits on a foundation that’s far more stable than investors might realize. Yes, distribution coverage has improved. But that improvement is backed by:

• Genuinely strong free cash flow generation across the sector
• Restored investor confidence after pandemic-era volatility
• Multiple MLPs with the financial muscle to buy back shares while maintaining generous distributions
• A track record now showing dividend sustainability, not just payment ability

The evolution from obsessing over distribution coverage to analyzing free cash flow and financial flexibility represents maturity in both the MLP space and investor sophistication.

The Bottom Line

Distribution coverage has bounced back significantly for AMZI constituents, but the real story extends far beyond that single metric. MLPs today operate with stronger balance sheets, more resilient cash generation, and proven distribution stability. For income-focused investors seeking yields north of 8%, these factors matter more than any ratio ever could.