Wednesday, March 5, 2008
Q: What is your view on continued ownership of large Canadian Energy Trusts? – C.H.
A: On October 31, 2006, I personally bought shares in a small Canadian royalty trust. On November 1, the Canadian Finance Minister told investors the royalty trust system was over. I lost half my investment in less than 24 hours, and I wasn't alone.
But I became an even bigger fan of the Canadian energy trusts.
The royalty trust structure allows natural resource producers to pass their earnings on to shareholders in the form of dividends... thus paying no corporate tax at all.
However, the Canadian government felt it was missing out on billions in tax revenues (and a host of conventional businesses were applying for royalty-trust status) and squashed the program.
As of 2011, royalty trusts will be taxed just like everybody else. But I still love 'em...
That's because they are great aggregators of production assets. In English, that means these companies bought long-lived oil and natural gas wells. These are better than a busted slot machine for producing cash.
Thanks to that deadline hanging over our heads, royalty trusts now pay double-digit dividends. I'm not worried about the deadline, because I think these companies will be bought up or taken private long before 2011.
So the short answer is, hang on to those trusts. And I'm looking into adding some to the S&A Oil Report portfolio.
Q: How much money do I need to get started in natural resource investing? – J.S.
A: Today's commodity investors have an incredible "toolbox" available to help them invest with a small amount of money.
For instance, a number of ETFs allow you to take a position in the price of crude oil (OIL, USO, UCR). Each of these is priced below $100. These "direct bet" ETFs are also available for gold, silver, natural gas, grains, livestock, and base metals.
You also have shares in natural resource companies. Some of my favorites are Big Oil producers like Petrobras and Chevron.
Among the biggest miners, you'll find BHP Billiton, Rio Tinto, Anglo American, Teck Cominco, Barrick Gold, and Newmont Mining. You can own 10 shares of Newmont for about $535.
Also... the variety of ETFs out there that hold commodity producers is mind-boggling. I recommend using ETFConnect to go through a fund's holdings.
Make sure the fund isn't heavily weighted toward just two or three stocks... and make sure the fees the fund company charges aren't more than 1% (some are even less than 0.5%). If you find the right one, you'll have a diversified way to own a lot of great companies with an investment of less than $1,000.
And allow me a shameless plug for the S&A Oil Report. It's called the "Oil Report," but we'll take a position in almost any commodity.
Right now is a fantastic chance to own a little-known type of commodity stock called a "royalty company." Put simply, these stocks are cheap, and they give you the right to participate in hundreds of promising resource projects with a small amount of capital.
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