We should all take a good look at master limited partnerships, or MLPs.
What’s notable about these investments is that their success is tied to demand as opposed to the underlying price of the given commodity, so they experience much less volatility than, say, oil prices, which makes their cash distribution payments more reliable. In addition, there always will be demand for energy, no matter what happens to the world economy.
How to own an oil well.
These partnerships were created by Congress in 1987 to spur investment in the energy sector, but only for companies engaged in “the exploration, production, mining, processing, refining, marketing or transportation of mineral and natural resources.”
There are two risks to MLPs. The first is that they constantly require capital to keep growing, and if credit tightens again or the secondary market weakens, MLPs with the weakest cash position might not survive. The second is less serious — namely, a run on mutual funds that hold MLPs, forcing management to sell the stocks. The good news is that after the panic subsides, investors often rush back in to income investments like these.
A quick note about taxes: MLPs must issue Schedule K-1 tax documents every year, and even if you sell an MLP stock at a loss, you might get dinged when your K-1 arrives and it shows income allocated to your shares, even if you never actually received any. Also, dividends paid by MLPs into retirement accounts are taxable, so check with your tax adviser before placing MLP investments in your retirement account.