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
Relevant Articles:
- 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
Popular Posts
-
There were five companies with at least a decade of dividend increases under their belt which hiked distributions last week. There was one ...
-
For this week’s review of notable dividend increases, I have included four companies which raised distributions last week. Each company has ...
-
I have long subscribed to the theory that buy and hold means buy and monitor . Dividend investors should continue monitoring their holdings ...
-
I started my website almost twelve years ago. During that time I shared my process of looking for and analyzing companies. I discussed my st...
-
It has been over a decade since the Great Recession ended. The end of the recession was marked with a profit rebound, and a continued rise i...
-
As an investor, there are a few things you can control. You can control how much you save, what strategy you have to achieve your goals, you...
-
The value of a business to a buyer in a going private transaction is its intrinsic value. In other words, if a business is acquired by anoth...
-
Dividend momentum is a strategy that takes full advantage of the theory behind companies in motion, who tend to stay in motion for years and...
-
U.S. Bancorp (USB) is a financial services holding company, which provides various financial services in the United States. It operates in ...
-
Warren Buffett is the second richest person in the world, a self-made billionaire investor that has a very large following. He is well know...
