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The Only Way to Play Energy Now

Austin Edwards
March 26, 2010

You and I both know it's coming.

And when it does, millions of us will look back on the past year longingly. Meanwhile, a handful of us will look back triumphantly.

$4 gas, here we come -- again!
That's right, I said it: $4 gas will be back, despite a shaky economy and the Obama administration's likely crackdown on speculators that the Commodity Futures Trading Commission now blames for 2008's historic run-up.

Because let's face it: Over the long haul, demand for oil and gas will drastically outstrip supply. And the majority of that supply is controlled by a handful of obscenely wealthy foreign businessmen who, as old T. Boone Pickens points out, don't like us very much.

Point being, oil and gas prices will eventually recover -- and then soar to new highs. When they do, everyone's going to get pinched at the pump -- yet only a few will get rich.

Will you be one of them?
Frankly, that all depends on what you do right now. I, for one, have been loading up on specialty deepwater drillers such as Transocean and looking to other lesser-known drillers such as Atwood Oceanics (NYSE: ATW  ) and Diamond Offshore (NYSE: DO  ) .

I've even picked up shares of the Energy Select SPDR, which counts oil and gas companies such as Anadarko Petroleum (NYSE: APC  ) , Apache (NYSE: APA  ) , and Marathon Oil (NYSE: MRO  ) among its top holdings.

I've also had my eye on smaller, specialty energy players -- for example, seismic-data-acquisition companies Dawson Geophysical and tiny TGC Industries. They're both swimming in cash and are well positioned to shoot higher when the price of oil and gas finally rises. Of course, there's only one problem ...

You don't want to wait forever to cash in, do you?
Neither do I. So I sat down with our in-house dividends expert, James Early, to ask him about the other way to play energy.

No, I'm not referring to oil-services companies such as Halliburton, Schlumberger, or BJ Services (NYSE: BJS  ) . Instead, I'm talking about a group of often-overlooked energy investments that make big money regardless of the price of oil and gas -- and that pay you big bucks to own them.

The only way to play energy now
You may already know that I'm talking about master limited partnerships (MLPs), but in case you don't, here's a quick rundown.

MLPs were born out of two Reagan-era tax reforms instituted to spur the development of U.S. energy infrastructure. Consequently, nearly all MLPs are involved in the transportation, storage, refining, or processing of oil and gas.

Yet MLPs charge by the volume of oil or gas they transport, refine, and so on, so fluctuations in the price of the commodities have only a minimal effect on their earnings. And because they're organized as partnerships, they're not taxed on the entity level -- which, for reasons I'll explain in a moment, provides investors a huge tax advantage.

It also means that, by law, they have to pay out the great majority of their earnings to their investors -- hence their ultra-high yields (typically from 6% to 10%).

You can buy MLPs online or through your broker, and they trade on major exchanges right along with regular dividend-paying stocks -- the one exception be