It was bound to happen. The monumental buildout of the U.S. electric grid to meet the demands of the explosion of data center development and the wholesale electrification of the U.S. economy paved the way for what is just recently a very bullish move higher for the energy infrastructure stocks.
Because natural gas is the go-to de facto immediate source of new raw power, the pipeline stocks have come into fashion. The United States is the natural behemoth, with arguably the largest current supply and proven reserves in the world. Natty gas is clean, green, in huge supply, cheap and easy for utility companies to deploy rapidly.
The growth forecast for the energy infrastructure sector is currently undergoing its most significant shift in decades. After years of focusing on energy transition, the narrative in 2026 has pivoted sharply toward energy affordability and grid reliability. The boring pipeline sector is now being viewed as a high-growth AI play. AI data center loads and liquified natural gas (LNG) exports are huge dual growth drivers.
The energy infrastructure sector is broadly divided into three main categories — upstream, midstream and downstream. The vast majority (about 70-80%) of the market is concentrated in the midstream subsector. The majority of the companies in this space operate as Master Limited Partnerships, or MLPs as they are widely known by.
The Master Limited Partnership structure was created by Congress in the 1980s for a very specific reason, so as to encourage private investment in the expensive, large-scale infrastructure needed to keep the U.S. energy independent.
From a business perspective, it is a hybrid that combines the best parts of a corporation and a partnership. In a standard corporation (like JPMorgan), the company pays taxes on its profits, and then investors pay taxes again on the dividends they give you. This is double taxation, and the piper gets paid twice in this structure.
An MLP is a pass-through entity and enjoys some major benefits. MLPs pay no corporate tax as they are classified as pass through entities. The MLP itself pays $0 in federal income taxes. All the so-called taxable income is passed directly to the investors who report it on their individual tax returns.
Because the government isn’t taking a cut at the corporate level, there is more cash to pay out to investors as distributions. In order to maintain this tax-free status, the law requires MLPs to derive at least 90% of their income from qualifying sources, which are essentially natural resources, minerals and real estate.
Since they don’t pay corporate taxes, MLPs are expected to distribute the vast majority of their available cash to investors. This is why MLPs often have much higher yields (5-9%) than typical S&P 500 stocks. Pipeline equipment is incredibly expensive and depreciates or loses value over time.
This depreciation is a non-cash expense that gets passed to investors. Because of this specific benefit, a large portion of the quarterly payment is often treated as a return of capital, which isn’t taxed immediately. Instead, it lowers one’s cost basis in the stock by the amount of the distribution received. Investors don’t pay taxes on that money until the units are sold.
As of early 2026, MLPs (tracked by the AMZI index) are yielding roughly 7.7%, far outpacing the Dividend Aristocrats, leading European dividend stocks and much of the emerging market stocks that pay dividends.
The one major headache of owning individual MLPs is the issuance of year-end K-1 tax statements that can be a big reporting burden. Not only are they typically issued late, but they can also cause one’s tax preparer’s bill to soar. Most investors that have delt with this in the past have sworn off buying individual MLPs.
To resolve this dilemma, in today’s market, there are ETFs that convert all the K-1 related income internally into 1099 distributions. This means that while the distributions still lower one’s cost basis, the income is reported as non-qualified ordinary income, and your accountant will thank you for making this decision.
Bear in mind that some MLP ETFs employ leverage to enhance what are already juicy yields and should be carefully considered before purchase. The most popular MLP ETFs distributing 1099 income that are seeing strong fund flows include:
NXG Cushing Midstream Energy Fund (SRV) — Current yield 12.31%
InfraCap MLP ETF (AMZA) — Current yield 9.12%
Alerian MLP ETF (AMLP) — Current yield 7.86%
Because these and other energy MLPs are taking on the expense of the internal conversion of K-1 related income to 1099 income, these can be owned in retirement accounts without triggering what is termed UBTI (Unrelated Business Taxable Income).
Even though the IRS gives every IRA a $1,000 annual exemption for UBTI from income received by individual MLPs, it is considered a red flag that can trigger an audit. It is best to utilize the ETFs that pay out 1099 income in IRAs and other retirement accounts and avoid drawing Big Brother’s attention.
The energy buildout in the United States is a powerful secular trend, and fortunately, income investors can lock in phenomenal yields and enjoy the prospect of capital appreciation with a built-in inflation hedge. Now that is a formidable investment proposition.
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