These special securities were designed for one sole purpose -- to provide investors with a steady stream of rising income. We're not talking about some fantasy investment idea. We're talking about a little known and often misunderstood group of securities called "General Partners" -- or "GPs" for short.

Only a few years ago, you couldn't invest in these money-making machines since they were the exclusive preserve of private equity firms and other insiders. But in the past three years, some GPs have started trading publicly in a bid to raise the capital needed to build the nation's energy infrastructure. Although the doors are now open to the public, many investors are not yet aware of the tremendous income potential of these distribution growth dynamos.

You've likely heard of master limited partnerships (MLPs), a group of about 100 securities -- mostly pipeline companies -- that boast double-digit yields and double-digit dividend growth. But you may not be familiar with the groups behind these MLPs, the people that really run the show -- the general partner (or more accurately, the company that owns the general partner).

Until recently, GPs offered dividend yields of about 4-5%. But now that has changed, and the average yield of the nine strongest and highest-yielding GPs is a solid 10.8%. That's right, the yield for this group has risen +151% between 2007 and 2008, as you can see from the accompanying chart.

As you know, yields rise as prices fall, but lower share prices are not the sole reason for the higher yields of these GPs. It may seem hard to believe in today's markets, when dividend stalwarts like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) have slashed payouts, but the GPs identified have seen their dividends (called "distributions" in partnership lingo) grow an average of +14.0% during 2008.

How GPs Make Money
What's behind this growth amid one of the worst years on record for dividends? It's called "incentive distribution rights" (IDRs). Don't let the legal sounding jargon fool you into thinking that these rights are worthless mumbo jumbo. In fact, they're the money-making catalyst for the general partners and the investors who own a stake in these GPs.

Here's how the system works. General partners manage the day-to-day business of master limited partnerships. The MLPs are like silent partners. They receive cash flow from the pipeline assets, but aren't involved in running the business. For instance, a GP would identify potential acquisitions, arrange financing, oversee operations, and even set dividend policy. GPs also may help fund growth by providing capital, loans, or other financing.

In return, GPs are amply rewarded for their efforts. They typically own a 2% equity stake in the MLP, but that's not all. They also receive a special management fee in the form of incentive distribution rights. These additional distributions are legally binding. They're paid out according to a pre-set formula that's given in the prospectus when the MLP is formed.

Exponential Distribution Growth
MLPs must pay out almost all their available cash each quarter to partners, including the general partner. Most general partners are also organized as partnerships or limited liability companies, so they must also distribute the bulk of their cash flow to unitholders.

Typically, the GP receives an initial 2% of the MLP's distributable cash flow to reflect its 2% equity interest, while MLP unitholders get the remaining 98%. As the limited partner's distributions increase, however, the percentage take of the GP also increases, often to a maximum of 50%.

Here's an example of how a GP's percentage take might increase as distributions increase.

You can see from this example that as the distribution grows for the MLP, the general partner receives a bigger piece of the pie, since it gets half of any amount over $0.39 per unit.

Just to be clear, we are not saying GPs make better investments than MLPs. While GP distributions grow faster, MLP distributions are larger since they receive a bigger share of the base distribution. MLPs also offer steady distribution growth, but GPs may be just the ticket for income investors willing to forego some current income in return for faster distribution growth, which in turn could fuel greater share price appreciation.

We also should mention that some GPs distribute so-called "i-units" in lieu of cash. These share distributions work like a dividend reinvestment plan for income investors, while allowing the partnership to retain more cash in the business for acquisitions and future growth.

Self-Interest Helps Drive Distribution Growth
You would be hard pressed to find many other investments in today's markets with this kind of distribution growth. And the good news is GPs are built to generate increasing cash flow. That's in part because insiders and institutions typically hold a major stake in them. In other words, when it comes to growing the distribution, the folks who determine the distribution policy have the same self-interests as retail unitholders like you and me.

Of course, the distributions can only grow as long as the cash flow keeps growing. Right now, some of the distribution growth is being driven by the tens of billions of new dollars the industry has spent on infrastructure over the past few years and the cash flow that's being generated from these new assets. The ongoing development of these projects, together with new projects coming on stream, should keep the distributions growing at a steady pace.

And the cash flow will keep coming whether oil prices are $150 a barrel or $50 a barrel. The partnerships receive fees for shipping, processing, and storing oil and gas. Depending on the contract, these fees can be fixed at a set rate or partly pegged to oil and gas prices. For the most part, however, they are based on volumes transported rather than commodity prices.

Also, many companies own pipelines that cross state borders. Fees from these interstate pipelines are government-regulated to ensure the pipeline owners receive a stable return on their investment in essential infrastructure. The fees are pegged to the Producer Price Index.

Risk Factors
Still, a recession could slow volume growth, while limited access to capital in today's tight credit markets could keep a lid on further expansion. That, in turn, could affect distribution growth, which would significantly impact GPs. Despite these constraints, however, the volume of oil and natural gas shipped across the country has tended to remain relatively stable, providing steady cash flow for distributions.

Another potential risk factor is the emphasis that will be placed by the new Obama administration on renewable energy sources. But with trillions of dollars of infrastructure built around carbon-based fuels like oil and gas, the shift likely will take decades to occur and is not of immediate concern.

A more immediate issue is the forced selling by hedge funds and other institutional owners that are deleveraging in order to raise cash. Since GPs tend to be heavily owned by institutions, their units have sold off sharply. While we're not going to try to time a bottom, when the forced selling is over, long-term investors can pick up some incredible bargains at these prices.

Tax-Advantaged Income
While some GPs are organized as ordinary corporations, all the GPs we've identified today are organized as partnerships or limited liability companies. That means they must pass along most of their cash flow to investors. It also means come tax time, you need to fill out a Schedule K-1 and not your standard Form 1099. These forms are somewhat more complicated, but the income these partnerships provide makes the additional effort well worth it.

What you need to know is payouts consist of two portions, each taxed differently. The smaller portion, about 10-20%, is your share of the GP's net income. That is taxed at your ordinary income tax rate in the year it's received.

Most of the payout, however, doesn't come from income but from cash flow (simply earnings plus depreciation less maintenance expenses). This portion is considered a return of capital and isn't taxed when received. When you sell your units, you're taxed at the 15% capital gains rate on the difference between the original unadjusted price and sales price (assuming your hold for more than one year). The return of capital portion is treated as ordinary income.

Here's how it works. Let's say you invest $10,000 to buy 1,000 units at $10 each. Over the years, you received total distributions of $1,650, of which $1,500 was a return of capital and $150 was net income. That leaves you with a cost basis of $8,500 ($10,000-$1,500). Now suppose you sell your units for $12,500. That gives you a taxable gain of $4,000 ($12,500-$8,500), but only when you sell your units.

GPs don't lend themselves well to IRAs, 401(k)s, or other tax-deferred plans. These plans are already tax-deferred, so they don't provide tax advantages. Also, any net income you receive from the GP over $1,000 counts as "unrelated business taxable income" (UBTI) and is taxable at your ordinary income tax rate, even in an IRA. Your plan custodian could file a tax claim, but it's complicated.

Finally, you may have heard rumors that the President-elect was reconsidering the tax-exempt status of these partnerships, but these have been proven to be largely inaccurate.

As with any investment, there are risks to holding a GP. However, given that they are trading with historically high yields powered by growing distributions, GPs offer ample compensation for these risks, in our view. In her most recent issue of High-Yield Investing, editor Carla Pasternak identified the nine top-yielding GPs that now trade on a public exchange and profiled her two favorite picks. If you'd like to learn more about GP's and the High-Yield Investing newsletter, please visit this link.