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
I've even picked up shares of the Energy Select SPDR, which counts oil and gas companies such as Anadarko Petroleum
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
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 being that instead of shares, you purchase units, making you a unitholder, rather than a shareholder.
"For investors who want a lot of payout without a ton of risk"
That's how James Early describes these investments in the comprehensive MLP guide he put together for members of our Motley Fool Income Investor community.
One of the MLPs he's recommending is Magellan Midstream Partners. Though not as well known as Kinder Morgan Energy Partners
Magellan is also flush with cash, and since going public in February 2001, it has increased or maintained its quarterly payout (called a "distribution" in MLP-land) for 33 consecutive quarters. Granted, it has already doubled since James recommended it last November -- but he still thinks there is plenty of upside, and it pays a juicy 6.1% dividend.
More good news
Because MLPs aren't taxed on the corporate level, you won't have to pay taxes on the majority of the cash you earn until after you sell the units, making these investments a great way to earn tax-deferred income.
In short, if you're looking for a way to cash in on energy right now, I'd look no further than Magellan Midstream Partners. It's just one of four MLPs, and more than 50 dividend-paying stocks, that James is recommending to Income Investor members.
You can get access to in-depth research on every single one, plus get James' comprehensive guide to MLPs absolutely free, by accepting a 30-day guest pass to Income Investor.
It costs nothing, and there is no obligation to subscribe. To learn more, simply click here.
This article was originally published Aug. 28, 2009. It has been updated.
Austin Edwards owns shares of Transocean and the Energy Select SPDR. Atwood Oceanics is a Motley Fool Stock Advisor recommendation. Dawson Geophysical is a Motley Fool Hidden Gems selection. Magellan Midstream Partners is an Income Investor recommendation. As always, The Motley Fool has a disclosure policy.
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