There are two types of partners in a Master Limited Partnership structure, a general partner and limited partners.
The general partner manages the master limited partnership and typically holds a 2% economic interest in it. The general partner also receives a percentage of the profits off the top, before the limited partners get their cut. These so called Incentive Distribution Rights allow the general partners to take a higher proportion of incremental amounts over a certain threshold levels. This provides the general partner with a strong motivation to raise distributions to unitholders, which is appealing to them.
The last tier is typically 50/50, which means that general partners receive 50% of any incremental cash flows above a certain threshold level. This could however increase the cost of equity for the MLP and dilute ownership claim of limited partners.
Limited partners are not involved in the day-to-day management of the MLP, and have limited liability. Once the MLPs reach the highest IRD threshold the distribution growth for Limited Partners slows down, while it increases for general partners.
Some MLP's such as Kinder Morgan (KMP), energy Transfer Partners (ETP) and Oneok Partners (OKS) have already reached the top 50% IDR level. Other MLPs such as Entrerprise Products Partners (EPD) have capped their incentive distribution rights threshold to a maximum of 25%. Check my analysis of Kinder Morgan Partners (KMP).
One way to capture the higher distribution growth potential is to purchase the General Partner Units traded on US exchanges. Not a lot of GPs are traded however. One general partner that has reached the 50% incentive distribution rights threshold is Energy Transfer Equity (ETE), which is the GP for Energy Transfer Partners (ETP).
Another major General Partner, whose units could be bought by ordinary investors is Enterprise GP Holdings (EPE). It owns the general partner and limited partner interests in Enterprise Products Partners L.P. (EPE), TEPPCO Partners, L.P (TPP) and Energy Transfer Equity, L.P (ETE). Check my analysis of Teppco Partners L.P..
Full Disclosure: Long Kinder Morgan Partners
- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- Using DRIPs for faster compounding of dividends
- Best High Yield Dividend Stocks for 2009
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- TEPPCO Partners (TPP) Dividend Analysis
As we all know, the stock market is at an all time high. That is despite the fact that earnings for the US corporations have been flat for ...
As part of my portfolio monitoring process , I evaluate the list of dividend increases every week. It is helpful to monitor how my investmen...
The ultimate goals of everyone reading this site is to retire wealthy and to stay retired. Financial independence provides flexibility, fre...
Many of you are aware that I have been a big fan of tax-deferred investing over the past three – four years. After my awakening moment in l...
Right now, many investors are sitting on huge unrealized gains in the companies they have bought years ago. I am in those shoes too. However...
After observing market behavior for 20 years, I have come to the conclusion that many investors do not have a clue about how to make money i...
It seems like international investing is all the rage these days. It seems like everywhere I look, someone is recommending investors to add ...
Medtronic plc manufactures and sells device-based medical therapies worldwide. Over the past week, dividend champion Medtronic raised its ...
I do not like it, when my dividend paying companies are acquisition targets. Last week, shares of Hershey (HSY) increased to an all-time ...
General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. It also supplies branded...