Welcome to the bonus lecture. In this lecture, we will be talking about master limited partnerships in short, mlps, and a bit about Rietz investments. Again, please take note of the disclaimer over here. This is an educational course, implying that you have to do your own due diligence, practice independent thinking and seek your own professional advice before buying into any stocks that are recommended in this course. With that, let's start off with first understanding what master Limited Partnerships is by going back in time and learning a little bit of its history. Master Limited Partnerships were formed in the US during the early 1980s.

Believe it or not, businesses back then were subjected to very high marginal tax rates and because of this, it made earning a decent profit difficult bus. Business owners and investors alike were particularly interest interested in finding ways to circumvent this heavy tax measure by any other means necessary. Hence, the MLP structure was created, allowing businesses to spin off portions of their assets and placing them under a tax advantaged regime. The structure was so attractive in terms of reducing tax costs that practically every business wanted to register as an MLP. As a result, in 1987, the government had to set rules and restricted the kinds of businesses that can exist as an MLP such as allowing only certain properties and investments to be held in these partnerships, implementing other rules like having at least 90% of the mlps income be derived from certain activities related to natural resources or other qualifying sources related to the business of production, processing, storage and transportation of oil and gas.

This is known as the income source to If the MLP fails this test even for a year, their operating profits will be subjected to the typical corporate tax rate. Most of the mlps I've encountered invests in natural resource infrastructure. Some of the best mlps, in my opinion, are the ones that invest in gas pipelines and electrical infrastructure. This is because their projects often require huge capital outlay, forming a natural high barrier of entry that prevent other competitors from entering and taking away their profits that easily. They're partial natural monopolistic nature coupled with the incentive to distribute stable cash flows is what makes mlps so attractive to dividend investors like myself. Now let's look at the structure of master limited partnerships and how it works.

The MLP structure can various some extent, but the parties involved for main real estate At least similar to a private equity structure, the parties are as follows. Number one, the general partner in short, the GP, also known as the management team, and number two, the limited partners in short, the LPS, the entity that contributes needed counsel and capital. limited partners are legal owners of the MLP and are considered by most as its most important stakeholder group. The LP contribute capital by buying units of the MLP. In exchange, they expect the management to maximize the return on their investment. If they are not satisfied with the performance they may sell their units back to the market or another party.

Do note here that units are known as shares. The GPS here can be considered as part employee and part owner, part employee because they are supposedly put in charge of maximizing profits of the partnership. By offering their time and skills, being active in the day to day operations and strategic and directing the partnerships long term direction, yet part owner because the GPS are jointly and severally liable for the partnerships legal obligations, including contracts and Personal Injury suits, units or shares of the GPS are usually unavailable to the common investor. Because of their positions, a principal agent relationship arises whenever one entity delegates decision making authority over resources to another agent. LPs are the principal whereas the GPS are considered as both the agent and part principal. While agency relationship often work well problems may arise if agents and principals have different goals for the MLP because the GPS generally no more than the LPS this information asymmetry as what the industry likes to call it give GPS the opportunity to take actions that may not be the best interests of the principal.

As such, there are mechanisms in place to monitor and align the GPS to the LPS interest. One of those ways is through incentives. LPs are rewarded with distributions from the operations similar to receiving dividends, but the GPS had a better not only do they receive a regular distribution from any common units that they own, but in many cases the GPS also holds incentive distribution rights IDR for short, that entitles them to a higher proportion of the LPS quarterly distribution. Having these idrs incentivizes the GP to drive distribution growth at the LP level, receiving an increasingly higher percentage of LPs incremental cash flow once the pale on the content units reaches certain predetermined targets, and doing so mlps in generally are inherently designed for distribution growth. The table here shows the payment structure of the general partners. As you can see, the higher the quarterly distribution, the more the GPS are rewarded.

But what's more important are the pros and cons to the dividend investor. Here's the bright side of investing in master lease partnerships. Number one, and LPs offer relatively high yields better than bonds, some mlps might even yield better than rates or other dividend growth stocks. Number two mlps are not required to pay corporate taxes, thus having more cash available to distribute to investors. And because investors can only buy units of the LPS those units are only taxed when they receive dividends. Number three, the nature of NLP is business there are sources of deriving dividend income from staple industries catering to business and household needs rather than to once hence there is a strong element of sustainability inbuilt in the revenue stream.

As with every bright side to an investment, there is also the dark side. So, here are the disadvantages of investing in mlps. Number one, their yield sustainability might be in question. Although an mlps revenue stream might be sustainable, their yields might not be mlps are incentivized to distribute most if not all of their cash back to unit holders. This might be the reason for their high yields. Unlike most of our dg and DS stocks, which can easily increase their dividends through internal funding, most mlps need to borrow money or issue new humans to continue growing Rolling there distributable cash flows.

This subjects investors to future dilution or credit risks. When times are good lenders and banks can't wait to lend money to mlps. But when times are bad access to capital becomes difficult and paying out almost all of their cash flow while straining their balance sheet in downturns could prove to be dangerous. putting into question the notion of the mlps yield sustainability. Number two, high debt high risk as most mlps carry a substantial amount of debt in their balance sheet. Naturally, they will be sensitive to changes in interest rates.

A small increase in the latter could see their cost of debt spike up and if they can't overcome this increase in interest expense. drastic measures have to be taken such as cutting dividends, issuing out more units or conducting liquidation as a last resort. Number three, set in stable but highly regulated industry mlps are highly regulated businesses. For example, many pipelines are regulated by the Federal Energy Regulatory Commission, which has the ability to set tariff and price rates. Any changes in regulations by the regulatory commission could significantly impact cash flows and the mlps yield distribution. Lastly, number four diversification limits the majority of mlps are exposed to the energy sector.

So if your dividend portfolio consists of mainly mlps, you will be overweighted on the energy sector, making your dividends sensitive to the commodity or energy prices like oil and coal. You should be aware of the benefits as well as the risks when it comes to investing in mlps. With that said, Let us move on to the MLP recommendations. Despite the shortcoming of investing in mlps, they can still be very rewarding if you pick the right ones and add them into your dividend portfolio, it is not uncommon to find mlps with yield of 5% or more. So here are three MLP counters. recommendation number one Buckeye partners BPL.

This MLP has clocked in a five year average dividend yield of more than 8%. The business that Buckeye partners deals with is operating oil pipelines and the storage terminals, a mainstream MLP with three business segments, domestic pipelines and terminals, which contributes 28% of their revenue. Global marine terminals, which contributes 18% of revenue and Merchant Services 54% of revenue. The company's domestic assets consist of more than 6000 miles of pipelines along with 120 terminals with an aggregate storage capacity of over 115 million barrels across its pipelines and terminals. In addition to its stellar asset portfolio Buckeye is widely diversified, with its four most important hubs being the Chicago hub, New York Harbor, the Gulf Coast and the Caribbean. dividend per share have been stable and have increased over the past 10 years.

However, distribution coverage has eroded at the start 2017 Buckeyes coverage ratio sank to 1.01 throughout the first half, due to higher costs and units outstanding. This means Buckeye barely covered its distribution over the first two quarters. This is one red flag I see. If you're interested in this MLP please closely track the company's results going forward to make sure dividend coverage improves. Next we have enterprise products partners or epd. In short, with a five year average dividend yield of more than In 6%, this MLP is one of the largest publicly traded midstream mlps with a market capitalization of $54 billion as of early 2018.

It has a huge network of assets, which include nearly 50,000 miles of pipelines and total storage capacity of more than 250 million barrels. epd operates for business segments, with 56% of its operating income coming from pipelines and services. Collectively, these segments generate significant cash flow, distributable cash flow increased 4% and the first half of the year, operating profit increase in all four of its operating segments led by a 34% increase in crude oil pipeline operating profits. Enterprise products has a long streak of consecutive dividend growth two, it has increased its dividend for 53 quarters in a row and has passed along 62 Distribution increases since its 1998 initial public offering. Its most recent quarterly dividend was 4% higher than the same quarterly payout last year. Even more good news is that this MLP as of March 2018, has no general partner incentive distribution rights, which leaves more cash flow for the business or investors.

To put it simply enterprise products balance sheet is in good shape. Last but not least, is a mera gas partners a PDU. With a five year average dividend yield of more than 8%, another high yielding MLP but with a twist, whereas most mlps are in the upstream or midstream segment of the oil and gas industry. America gas is the largest propane distributor in the US. America serves approximately 2 million customers with Roughly 1900 distribution locations. The general partner of America gas is ugi Corporation, which owns 26% of America gas.

Propane sales represent nearly 90% of annual revenue. The other 10% of annual sales consists of related equipment and accessories. In my opinion, the propane industry is very steady one as customers need propane to heat their homes during cold periods, which gives American gas a demand assurance I'll be at a seasonal occurrence. dividend growth have been stable for the past 10 years. Yet despite all the good points mentioned, the caveat is unusual pro long warm temperature which can affect this mlps profitability referencing to the year 2016. The unseasonally warm temperatures back then depressed demand for propane, which is why America gas is operating income filter percent for FYI 2016.

Having gone through the recommended mlps, you probably figured out some aspects of how to analyze a MLP. But just to make sure here are some pointers on how to do so. point A, you have to look at cash flow and not so much on the mlps earnings. Earnings have little meaning when it comes to analyzing these investments. The reason for this is that mlps are typically so asset heavy that large depreciation amounts paints irrelevance over its earnings figure, while the cash flow is typically much larger. Note that depreciation is a non cash accounting item.

So instead of looking for an increase in earnings per share, look for free cash flow per share instead. Point B analyze the mlps distribution yield and also read about the management's future plans and guidance. To find out whether the current distribution is sustainable, I tend to go for mlps that do not have very aggressive incentive distribution rights, ie ours. As more cash is saved to fund future growth, the management will be less pressured to take on more debt to fund growth. Point C, analyze the debt situation. We know that mlps typically take on a lot of debt, since they rely on enormous sets of assets to generate the revenue.

As such, the interest coverage ratio is something to look at, make sure the interest payments on debt are well covered by their operating cash flow. I also pay particular attention to the type of debt they use to finance their assets, whether it is a high portion or fixed or variable debt. Given that interest rate is expected to rise in the near future, a higher proportion of fixed debt is preferred and the mlps total liability figure There you have it. In closing, I hope you have enjoyed this course and have inspired you to start forming your own dividend portfolio. It has been a pleasure teaching you do check out the remaining bonus lectures, our Facebook page and the discounted offer in uncle stock. Once again, thank you for taking on this course and all the best to your dividend investing journey.