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The Best New Income Play In the Market

By Dr. Steve Sjuggerud
Wednesday, November 22, 2006

Want to make 12% to 14% a year in income for the next three years in a tax-advantaged way, with the potential for much more?

I shared exactly how to do that in the latest issue of my newsletter, True Wealth. And I’ll share the big idea with you now...

It’s an investment that has been completely ignored since the government created in 1986 a special loophole for a group of “tax-free” businesses. But for a few specific reasons, its time hasn’t arrived until now. Here’s why...

Investors haven’t paid much attention to this great opportunity before because:

1) This opportunity had good competition from other investments in the past, such as real-estate investment trusts (REITs) and Canadian income trusts; and

2) Changes are happening now that could allow this investment to performsubstantially better than the “base case” of 12%+ per year.

Let me tell you exactly what’s happened here...

You might remember my story three weeks ago on theCanadian Income Trust Debacle. Until last month, Canadian companies that qualified as income trusts paid out 90% of their distributable cash to investors and weren’t taxed. It was too good to be true... On Halloween, the Canadian government proposed converting all the tax-free income trust companies into taxpaying companies by 2011. Shares of Canadian income trusts fell instantly and hard. The Canadian government killed billions of dollars overnight.

Canadian income trusts used to be a great deal for U.S. retirees. Not anymore. (We don’t have to worry about that in this new recommendation... unlike in Canada, the U.S. Tax Reform Act of 1986 was very specific in which companies could qualify for the tax-free status. That’s why there are only about 70 of them today.)

It appears that the tax rate for Americans invested in Canadian income trusts could be in excess of 40%. So that’s what’s wrong with Canadian income trusts... But you probably haven’t heard what’s wrong with REITs...

For a long while, REITs were great investments, too... As long as REIT companies pay out 90% of their income in the form of dividends to shareholders, they are not taxed. Because of this, REITs were a good deal for Americans, particularly for their retirement accounts, because they earned high dividends from rent and made profits as the value of the real estate kept going up.

Now, you can’t count on either: You can’t count on real estate going up, and the dividend yields on equity REITS are terrible now – at just 3.73% (according to

Meanwhile, among these 70 government-approved tax-free businesses, the median dividend is 5.6% right now. Even better, not only do these businesses not have to pay taxes, YOU WON’T HAVE TO PAY TAXES EITHER, at least for a long while (you don’t pay taxes until you sell, for the most part).

Right now, these government-approved tax-free companies are a much better deal than REITs. At 5.6% versus 3.73%, the dividends are much higher (and have a bigger tax advantage because the dividends are tax-deferred for U.S. investors).

Plus, the underlying growth potential is much higher... Many of these businesses have increased their dividends every quarter since inception. In financial theory, increases in dividends should lead to similar increases in share prices.

When you add 6% dividends for the industry to dividend growth of 6%-8% a year, you’re looking at the potential for 12%-14% annual returns, if nothing changes...

But I think things will change and cause the share prices of these government-approved tax-free businesses to soar, for a few reasons...

* Investors are leaving Canadian income trusts, and they’re getting nervous about REITs. Where are they going to put their money? They haven’t yet discovered what I’m sharing with you today. But they will.

* Baby boomers are tired of stocks and real estate, and they want stable income. Where are they going to put their money? Again, they haven’t discovered these tax-free businesses yet, but they will.

* What if Bush’s dividend tax cut is not renewed? It’s set to expire in 2008. These tax-free companies will be much more attractive than regular dividend-paying companies if the dividend tax cut isn’t renewed.

* Also, until recently, institutional investors really couldn’t invest much money in these. But a new law was recently passed, allowing institutions (including the huge pension funds and mutual funds) to invest up to 25% of their assets in these tax-free companies. Up until recently, individual investors made up 70% of the shareholders of these special businesses. I expect that will flip-flop in the coming years as institutions pile in, driving the share prices up.

Again, we’re looking at tax-advantaged 6% dividends, with 6% to 8% internal growth – for total returns that should end up in the range of 12% to 14% per year, even if the stocks don’t soar... and I expect they will.

They’ll soar because they’re ridiculously cheap compared to the high-yield alternatives. They will soar as individual investors find out about them. They will soar as more institutions are able to invest in them. They will absolutely soar if Bush’s dividend tax break is not renewed in 2008.

These master limited partnerships, as the IRS classifies them – or “supplemental retirement income” companies, as I call them – are a little investment nirvana right now, with high tax-deferred yields in a stable, necessary business. Invest in them now, before everyone else figures it out. (For all the specifics on how these things work, you can visit

I highly recommend you learn more about these... as I expect we’ll be hearing a lot about them in the next two to three years. Better yet, come on board as a True Wealth subscriber, and you’ll learn the best way to play this idea.

Good investing,


Market Notes


The Next Generation Internet is already pushing up stock prices…

Just as massive telecom traffic forced the first generation of seven-digit phone numbers to be increased to 10 digits, booming communication and media demand have rendered the current Internet system too small, too slow, and too expensive. The Next Generation Internet (called IPv6) will change all that.

Here’s what our in-house technology expert, Porter Stansberry, had to say on our current state of Internet affairs:

The current Internet was built to hold about 4 billion unique IP addresses. But because every fax machine, cell phone, computer, Blackberry, and dozens of other gadgets that require Internet access need their own unique IP address, the current Internet has become overloaded. We’re due for a massive upgrade. If you do nothing else next year, invest in stocks that will benefit from it.

We’ll feature more of Porter’s telecommentary in coming issues ofDailyWealth. In the meantime, you can watch the money flow into places like the Powershares Telecom & Wireless Fund. Containing stocks such as Level 3, Verizon, and Cisco, this fund is soaring as the world demands faster communication and stupid Internet videos.

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