The Secret Way To Play Oil
By Susanna Hamner

(Business 2.0) – As the price of crude climbs, why not use it to fatten, rather than empty, your wallet? Put your cash in a Canadian royalty trust and you could soon be collecting annual dividends of 10 or even 20 percent.

But just what on God's increasingly less green earth is a royalty trust? Good question. In Canada, at least, it's a publicly traded oil or gas production company that avoids corporate taxation by funneling all of its taxable income--typically 50 to 90 percent of its cash flow--to its investors. Run like a regular corporation, a royalty trust buys and operates oil and gas wells and pays investors a percentage of all sales of oil extracted from the land. The higher the price of oil, the larger the revenue, and the more money that ends up in investors' pockets.

Though the term "royalty trust" does exist south of the border, the definition is drastically different. American royalty trusts typically don't acquire new assets and aren't managed like corporations. And while dividends from U.S. royalty trusts are taxed like income, payouts from Canadian trusts qualify for the 15 percent dividend rate. But as with all seemingly stellar investments, there are some pitfalls. If energy prices should suddenly drop, your dividends could plummet too. Patrick Bryden, a research analyst at RBC Capital Markets, recommends trusts whose managers keep an eye on replenishing reserves, including ARC Energy Trust, Focus Energy Trust, and Penn West Energy Trust. These companies may not be household names, but they could help you retire like royalty. -- S.H.