Wednesday, March 31, 2010

What do Masters and Royals have in common?

It is hard to say if the dust has completely settled from the passage of the health care bill. Most of the provisions will not go into effect for some years to come if at all, depending on the outcome of the legal challenges and mid-term elections this year. Several companies have already decided to take significant losses now because of changes in the tax law and the tax treatment of their retirement health care plans. Deere and Company and Caterpillar just announced that they would take about $250 million in losses, which they say are related to the passage of the new law.

My clients know that over the last year I have been adding Master Limited Partnerships and Royalty Trusts to their accounts. Let’s discuss the reason why. These two structures are pass-through structures meaning that the income is generally taxed just once unlike a regular corporations, which pay taxes on earnings and then distributes dividends, which are taxed again to the investor.  TC Pipe Lines (TCLP) is a Master Limited Partnership, which operates natural gas pipelines in the mid-west and west. It sells for about $38 and has a dividend yield of just under 7.75%. We own this company because no matter how bad the economy gets people will still need natural gas to heat their homes and cook their food. TC Pipe Lines moves natural gas regardless of the price of natural gas and in turn we get paid for every cubic foot of natural gas that goes through their pipelines.

A Royalty Trust owns a percentage interest of natural gas or oil in the ground. We own Cross Timbers (CRT). We don’t speculate on where to find the natural gas and we don’t drill for it. We buy the reserves after they have been discovered and proven.  In the case of Cross Timbers we own 16 2/3% of every dollar of revenue derived by the sale of natural gas. The current yield for CRT is just under 6.75%. These are simpler structures than corporations and they pay excellent dividends, some at least for now, are tax-favored and may if fact increase in the future. In many of my accounts I have several MLP’s and Royalty Trusts to spread the risk around by region and commodity. If you’re thinking about these great income generators buy several. These investments are very defensive by nature and offer great current income potential. 

If we don’t put Americans back to work soon then the economy will grow at a sluggish pace and you will need cash flow to keep your money growing. With inflation at 2% and potentially increasing you need high current yield which Master Limited Partnerships and Royalty Trusts can give you.

Dan Perkins

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