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Strategy Three: Invest in Income Trusts and Master Limited Partnerships

SNAPSHOT: Canadian Income Trusts

How It Works:
Trusts make money extracting energy—in the form of oil, gas, coal, or timber— from the earth and pass those earnings directly to investors through monthly dividends.

THE UPSIDE:

  • Dividend yields of 10 percent or more
  • Tax breaks possible for U.S. investors
  • Will increase in value if natural resource prices continue to rise

THE DOWNSIDE:

  • Changing Canadian legislation may reduce future yields
  • Prices are volatile—you could lose if you sell at the wrong time
  • Somewhat cyclical: If a slowing economy lowers natural resource prices, royalty shares may lose value

Who Should Invest:
Want a risk-free investment where you can withdraw your money anytime? Then don’t invest in income trusts. On the other hand, if you have money to invest longer-term, consider income trusts, which can offer yields of 10 percent or more.

 

SNAPSHOT: Master Limited Partnerships

How It Works:
These are entities similar to the trusts described above. Though they are traded similarly to the trusts, legally speaking, you become a partner in the corporation, and receive a K-1 form, rather than a 1099 for tax purposes. Most master limited partnerships invest in pipelines for oil and gas, rather than the actual extraction of oil and gas.

THE UPSIDE:

  • More stable prices than trusts
  • Not affected by Canadian legislative changes
  • You can invest in funds rather than specific companies

THE DOWNSIDE:

  • Yields are generally lower than trusts, though still much higher than bonds or Treasury bills
  • Tax reporting is more complex than for trusts
  • Must not be used in nontaxable accounts (such as IRAs)

Who Should Invest:
If the volatility of income trusts seems daunting, master limited partnerships provide a less-exciting alternative. They also are not affected by changes in Canadian law. However, you may not see the spectacular returns available with trusts. Also, if you’re investing a nontaxable account (such as an IRA) DO NOT invest directly in MLP shares. Believe it or not, this can actually cause the account to lose its tax-free status!




Strategy Four: Invest in High-Yield Stocks