From The Dividend Monk:
For investors looking for fairly safe high yields, Master Limited Partnerships can potentially be a good choice. They offer fairly high distribution yields that are typically well-supported by cash flows from stable toll-booth type businesses. Since most of the cash flow is paid out as distributions, growth usually comes from issuing new units. This dilutes unitholder ownership but if the numbers work out, it adds value to all parties involved.
One of the primary aspects of an MLP is the Incentive Distribution Rights (IDRs) payout that the partnership pays to the General Partner (GP). The thing that makes MLPs particularly appealing for dividend investors is that the whole structure is centered around the distribution payout, rather than allowing the payout to be an optional use of cash like in a typical corporation.
Put simply, IDRs are structured as follows: the general partner is entitled to a percentage of the total cash flow of the partnership, and this percentage is based on the current size of their quarterly distribution payout to limited partners.
So if management does a good job of growing the per-unit value of the partnership (and correspondingly the per-unit distribution to limited partners) over time, then the holders of the general partner benefit even more, but everyone should be pleased with substantial returns.
A potential problem arises, however, if those incentive distribution payouts get too large...
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