Deciding on the Right Oil Dividend
U.S. energy trusts like Permian Basin Royalty Trust, which Cramer recommended on Thursday night's show, can be a great way to play the rising price of oil. These companies, which are master limited partnerships, meaning they have to return 90% of their profits to shareholders and in exchange they pay no corporate taxes, typically have very high yields and should more or less track the price of oil.
But energy MLPs can be complicated, and it's very important to know exactly what you're buying. Permian Basin is an exploration and production MLP, like Linn Energy, BP Prudhoe Bay, Hugoton and Atlas Energy Resources. If you want to make a bet on rising oil prices, these energy MLPs are for you. They make their money taking oil and natural gas out of the ground and selling it, and you get the profits from their distributions, which are similar to dividends.
For these partnerships, the distribution you get rises and falls with the price of the commodity, and the share price normally follows.
But not every energy MLP is a play on higher oil or natural gas prices. There are also pipeline MLPs that get their money from transporting the stuff, stocks like Kinder Morgan Energy Partners and Energy Transfer Partners, which Cramer has consistently recommended on the show. These are much less reliant on commodity prices. That was a good thing when oil prices were plummeting, but don't get confused and buy these as direct bets on more expensive crude. That's not what they are.
Then there are gathering and processing MLPs like Williams Partners, Atlas Pipeline Partners, and DCP Midstream Partners. We're not fans of these stocks. Jim put them in the Sell Block because they all need the price of oil to be at least $74 a barrel in order to maintain their distributions. They may look like they have high yields, but with $45 crude there's no guarantee that they won't cut their distributions, and every risk that they will.
The other thing to keep in mind when you're investing in energy trusts is that distributions are not treated as dividends when it comes time to pay the taxes. The tax-rate on dividend income is 15%. But distributions from MLPs are treated as a return on capital, which can do whacky things from a tax perspective. Your taxes on distribution income might be deferred, or partially deferred until you sell the stock. But no matter what, it will be complicated. For 2008, Permian Basin released a 17-page document to shareholders explaining how to pay taxes on its distributions. Seventeen pages, and every one of them confusing as all get out.
So if you own an MLP, please, please talk to a professional tax advisor!
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.
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