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Market Watch Pay Me Weekly By Neil George
Market Watch Pay Me Weekly By Neil George 
Market Watch
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By Dr. Russell McDougal Dear Reader, Admittedly, I’ve been hammering at U.S. dollar problems for going on a year now at IDE. It has certainly cooperated with my projections to date. What exactly does it mean to you now and in the future? Let’s go there. |
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| Pay Me Weekly By Neil George |
| Saturday, 13 October 2007 | ||||||||
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This led to a collection of Canadian companies called income or business trusts that were in many of the industries that we wanted to be in. They did more than most of their peers in the US: They paid out a big chunk of the profits either monthly or quarterly. Most of us made a killing, not just from the biggie dividend flows but also the share appreciation, as more and more investors from around the world followed in our footsteps. But to keep the cash flowing, we aren't just limited to Canada. Instead, there is a series of new cash cows located both internationally and right here in the US. All it takes is simply learning how this form of incorporation works and what, where and how to buy it. What made Canadian trusts so attractive is that they're structured to pay out profits to unitholders rather than just letting them pile up idly or paying them out to management. But with the new tax laws, most of the trusts will be changed dramatically in the coming quarters.And with those changes, it won't make sense to own most of them unless you're a speculator or have a good handle on the trusts that can make the transition to the new Canadian tax regime. But this doesn't mean that we don't have other great alternatives that run businesses in varied industries and pay us our cut of the profits. They're called partnerships. And we don't have to worry that one government will surprise us with some new tax change; there are plenty of partnerships in markets from Canada to Europe and Asia. We actually have plenty of quality partnerships right here in the US, too, that own great assets with lots of cash flowing to their investors. Over the last five years alone, the market for US partnerships has returned an annualized 20 percent, including dividends and ample price gains, making mincemeat out of the large oil companies in the US and many of the Canadian petrol trusts. And it’s been way ahead of the general US stock market as measured by the S&P 500.But what’s past is mere prologue. Even with this great performance, partnerships are still cheap, with yields of 5 to 10 percent-plus coupled with dividend distribution growth ranging from 5 to 15 percent or more. In other words, the best partnerships offer a combination of high current income and the potential for that income to grow rapidly over time. The average petrol partnership currently pays around 6 percent and has managed distribution growth of more than 9 percent annualized over the past five years. And that 5.9 percent is based on trailing dividend yields; looking at indicated yields (declared distributions for the coming year), the average is nearly a full percentage point higher at 6.8 percent.
But just as we cashed in on in Canadian trusts, dividends are just the beginning. We can also grow our cash flows in partnerships. Although many markets still have some stocks and trusts yielding more than 5.9 percent, there are fewer that can grow distributions by 9 percent annualized. In the better portion of the market for partnerships, distributions can expand, keeping yields high even as stock prices continue to climb month after month and year after year. Let's start with the US market for local partnerships. Partnerships, also known as master limited partnerships, are limited liability shares that trade on the major exchanges, including the New York Stock Exchange (NYSE). Unlike regular corporations with publicly traded stock, partenerships don't pay any corporate-level tax; instead, these partnerships pass through the majority of their income to investors in the form of regular (typically quarterly) distributions. In this way, they're similar to the old Canadian trusts but without the tax risks. Partnerships raise capital by issuing units--the rough equivalent of shares in a common stock. When you buy a partnership unit, you're known as a unitholder.To qualify for status as a US MLP, a partnership must receive at least 90 percent of its income from what the IRS calls qualifying sources. These include activities related to the production, processing or transportation of natural resources like oil, natural gas and coal as well as other commercial ventures that can range from real estate to transportation and just about every other major form of an industry or business. MLPs consist of two basic entities: limited partners (LPs) and a general partner (GP). As an LP unitholder, you’re entitled to cash distributions that come from the basic operation of the partnership business—basically, the cash flows received from running the business. But LPs don’t actively manage or control the assets of the partnership. The actual day-to-day management of an MLP is a task performed by the GP. GPs typically are compensated for their services in two ways. First, most GPs also own LP units and receive cash flows just like any other unitholder. Second, GPs earn what's known as an incentive distribution, which covers their management duties. The effect of the incentive distribution formula is that, the higher the quarterly distributions paid to LP unitholders (investors in the MLP), the higher the management fee paid to the GP. The idea behind this is that the GP has an incentive to try to boost distributions. The bottom line is that partnerships are simply another form of incorporation that enables companies with steady, cash-generating businesses to efficiently raise capital and distribute profits to share/unitholders.Milking the partnerships comes from the steady stream of dividends. And although many of the yields are in the single digits, it’s the return on our principal and, even more so, the return of our principal that really matter. Right now, there are plenty of Canadian trusts with huge double-digit dividend yields. And many of these trusts also had similar dividends before the tax bombshell. Some were the most successful of trusts, but some also needed to pay a lot in order to keep raising capital in share sales. Many of these were already taking hits, only to unwind when the tax changes were announced. For us--and for those who learned their lessons the hard way--the answer is simple: Companies with steady, sustainable dividends, along with solid businesses that can expand their revenues and profits, are the way to go. And for the most part, this structure makes up modern partnerships. Sure, big dividends are great--as long as they come from steady, growing businesses that will be there for us in the years to come. But how are partnerships going to give us both, and why can they be counted on for the long term, not just the near term? The importance of the income growth potential is what makes partnerships so attractive. Consider the case of ENTERPRISE PRODUCT PARTNERS (NYSE: EPD), one of our favorite MLPs inside The Partnership Portfolio. Consider that your $4,860 annual distribution represents nearly a 20 percent yield on your initial $25,000 investment. And that's all on top of the more than $50,000 worth of capital gains in Enterprise during the same time period. The total return on this holding, assuming you reinvested dividends: 420 percent or 26.7 percent annualized. With payout growth that strong, it doesn't take long to generate a truly impressive income stream from partnerships. Source Excerpted : Pay Me Weekly This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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