Stock investors are no stranger to the concept of size.

The evidence is well-documented that small companies tend to outperform their larger rivals. Since the bottom of the recession in 2009, the Russell 2000 index of small-cap stocks has jumped 196% against a return of 164% for stocks in the S&P 500.

But does the same logic apply to master limited partnerships? As it turns out, size does matter, but now how you might think.

Because MLPs play by a different set of rules than ordinary corporations, size affects them differently and creates an opportunity for investors that know how to spot the difference.

One of the best ways to identify the size sweet spot is the cost of equity and debt.

Since they distribute most of their cash flow to unitholders, they must constantly issue debt or equity to fund growth.

By virtue of smaller economies of scale and more risk, smaller firms may not have access to cheap debt and may have to rely on revolving credit which is more expensive.

These firms are extremely susceptible to rising rates and problems in the debt market. If liquidity disappears for debt, as we saw during the financial crisis, these partnerships could be slammed with prohibitively high costs.

#-ad_banner-#On the other hand, large firms can borrow more easily and cheaply. Average cost of debt for the mega-partnerships, shown in the table below, is more than a percent lower than the smallest group.

Cost of equity capital is related to size as well but may be a double-edged sword for large partnerships.

Smaller, less liquid firms may have trouble raising equity capital without a large base of investor interest.

With an average volume of just over 53,000 shares, the smaller partnerships below must compensate equity investors for the increased risk.

Larger partnerships may be more liquid but generous incentive distribution rights (IDRs) to general partners can act to increase the cost of equity significantly. As the distribution increases, the general partner takes a larger portion of the cash flow. This can be as high as 50% for some partnerships and increases the cost that the company pays for equity issuance.

The high cost of IDRs was a factor in what led industry guru Richard Kinder to propose a buyout of his MLP, Kinder Morgan Energy Partners (NYSE: KMP), last month. The high cost of equity capital, due to higher payouts to the general partner, made the partnership less competitive against others in the equity market.

Atlas Energy (NYSE: ATLS) enjoys a cost of debt and equity that is more than a percent lower than others in its group, which is significantly lower than partnerships in the small-cap or mega-cap groups.

With a market cap of $2.3 billion, the company has enough size and assets to secure cheap debt funding. The partnership has no general partner so unitholders do not have to worry about expensive IDR schedules or conflicts. The partnership also owns the general partner rights to Atlas Resource Partners (NYSE: ARP) and Atlas Pipeline Partners (NYSE: APL) so it collects revenue from management of the two affiliated partnership assets.

Risks to Consider: The developing U.S. energy revolution has moved MLPs to center stage for income investors but not all partnerships are created equal. These complex structures have unique characteristics with which many investors might not be familiar. Deep research is needed to understand the advantages and disadvantages of each company.

Action to Take–> Increased consolidation in MLPs is likely to hinge on size considerations like cost of capital and the ability to increase distributions. While larger partnerships offer stability and smaller partnerships may offer faster growth, the sweet spot between $2 billion and $6 billion may offer the best of both worlds.

By the nature of how MLPs are structured, these investments are some of the highest-yielding stocks on the market. However, high yields don’t always equate to profitable companies. My colleague, Nathan Slaughter, has spent months finding the most stable and profitable companies that sport the highest yields around. To learn the name and ticker symbols of some of these stocks, click here.