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The Other North American Income Trusts

By Stansberry Research Interview Series
Monday, November 6, 2006

Unless you’ve been living in a cave the last week, you’ve heard about the Canadian government’s proposed tax on Canadian income trusts.
 
For years, these have been an income investor’s dream... paying out massive dividends to their shareholders. As long as 90% of their income was paid out to shareholders, these companies weren’t taxed by the Canadian government.
 
Because of this, more and more companies were converting to this corporate structure. And the Canadian government was receiving less and less in corporate taxes each year.
 
Last Tuesday, the Canadian government proposed to end all tax benefits to these companies by 2011. Bear in mind, this is a proposal not a law. However, for American shareholders, much like longtime bachelors, the mere idea of a proposal is enough to make them cut and run. And cut and run they did, pushing income trust shares down 10%-20% in two trading sessions.
 
So if you’re looking to get your income fix elsewhere, consider master limited partnerships (MLPs) - the other North American income trust.
 
MLPs, much like Canadian income trusts, receive tax benefits provided they pay out 90% of their income to shareholders. These companies are usually broken down between a general partner (usually a majority holder) – who manages the company and assumes legal obligations – and limited partners (common shareholders) who put up the capital.
 
I’ve talked about companies like Houston-based MLP Enterprise Product Partners (EPD) in these pages before. Enterprise’s founder and chairman, Dan Duncan, is one of the biggest advocates of MLP investing in the world. But rather than preaching from his soapbox about the advantages of these investments, he simply buys millions upon millions of dollars worth of EPD stock.
 
In 2005, Duncan bought more than $59 million worth of EPD’s stock. And over the last eight months, he’s purchased an additional $13 million worth of EPD’s shares.
 
Why would he buy this much stock?
 
Because with Enterprise’s current yield of 6.7%, he’s making boatloads of cash annually, regardless of capital gains.
 
If you’re looking for an alternative income plays, I recommend looking into MLPs like Enterprise. My Inside Strategist subscribers have seen annualized gains of 25% since I added the company to the portfolio a few years ago.
 
And if you’d like something brand spanking new to consider, Dan Duncan just filed with the SEC to take another master limited partnership, Duncan Energy Partners, public in the near future. The date and price of the IPO are not set yet, but as soon as they are, you’ll read about it here.
 
Good investing,
 
Graham




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