And it's not just about the cash coming our way. The cash and dividend payments tend to prove which companies are solid investments. If management isn't cutting us in on our fair share of the profits, it will have a tough time keeping our money--or getting it in the first place.

This ethos is the foundation on which we've built our collection of core holdings during the past several years. And it's paid off. We've not only continued to out-gun the broad stock indexes, this past quarter included, but we've actually made money year-in and year-out.

This approach hasn't been without some interruptions along the way. We've had to endure ups and downs in interest rate markets, Canadian tax law changes and sometimes just erratic trading with no discernible rationale.

So we adapt.

We keep working to find companies in solid industries with improving markets that pay big dividends. We dig down further from there, looking for companies that tend to stay below Wall Street's radar. What results is less volatility and fewer chances that droves of cattle-like investors will stampede in or out.

It doesn't mean we sacrifice big dividends and gains; it simply means we have to explore different kinds of companies. Our new favorites are publicly traded partnerships.

We've begun to build our collection of top partnerships during the past several months with very good results.

And we're not alone. More and more companies are either converting assets into or issuing new partnership shares.

The proof isn't just in our growing collection; it lies in the broader market for partnerships as a whole. During the past five years when general stocks haven't been such an easy place to make profits, partnerships have been building value and returns for investors at a solid, steady pace.??The average annual return is running more than 21 percent a year for the last half-decade. In 2006, the group returned a whopping 38 percent.

These gains are impressive, but they also come with a lot less volatility than the general market. Comparing the volatility of the public partnerships with the S&P 500, you'll find that partnerships are trading with about half the risk of the market's ups and downs.

Greater stability, big dividends, and we don't have to worry about Canadian tax law.

Let's learn our LPs and K-1s.

Partnerships are limited liability shares that trade mainly on the New York Stock Exchange (NYSE).

Unlike regular corporations with publicly traded stock, master limited partnerships (MLPs) don't pay any corporate-level tax; instead, these partnerships pass through the majority of their income to investors in the form of regular distributions, usually on a quarterly basis.

Partnerships raise capital by issuing units much like common stock and are set up typically as either one of two basic entities: limited partners (LPs) and a general partner (GP).

As an LP shareholder, you're entitled to cash distributions that come from the basic operation of the partnership business. But LPs don't actively manage or control the assets of the partnership. This role is performed by the GP.

GPs are compensated for their services in two ways. First, most GPs also own LP units and receive cash flows just like any other partner. Second, GPs earn what's known as an incentive distribution, which covers their management duties.

The effect of the incentive distribution formula is that the higher the distributions paid to LP investors, the higher the management fee paid to the GP. The idea behind this is that the GP has an incentive to maintain and bolster LP dividend distributions.

Partnerships don't pay tax at the corporate level, provided their activities are considered qualified. Instead, quarterly distributions are passed directly to us; then we pay individual taxes on the dividends.

Partnership distributions can be highly tax-advantaged. The IRS doesn't treat these distributions like it does those flowing from normal common stocks, so you won't get a 1099 at tax time. Instead, you'll get a K-1.

This leads to some big tax benefits because of depreciation allowance; 80 percent to 90 percent of the dividend paid by a typical partnership, across most industries, is considered return of capital by the IRS.

You don't pay taxes immediately on this portion of the distribution. Instead, return of capital payments reduce your cost basis in the investment. You're not taxed on the return of capital until you sell the units. That means, at worst, we get to defer taxes for years to come.

Form K-1 and accompanying documentation have become clearer in recent years. But it does require filing additional forms with your annual return and keeping records of your cost basis. However, the benefits of tax deferral coupled with high current income outweigh the minor nuisance of more paperwork.

Another key advantage: Many big institutional investors aren't set up to invest in many partnerships because of their tax status. This means fewer institutions monkeying around with the trading of partnerships. The result is more stability because the shareholder base consists of a greater number of longer-term individual investors.

There are some variations on the structure offering similar tax advantages but without K-1s (see below). And for those wanting to avoid it all (including the tax benefits) there are investment vehicles similar to closed-end funds that simply report dividends in 1099 format.

Partnerships span numerous industries, from petrol to transportation to real estate and beyond.

But much of the core has been in petrol, which is fine by us. We have two inside the Growth Portfolio and a potential third in coming issues of Personal Finance.

Both of these are in the oil and gas industries, with a bit more on the gas side. One focuses primarily involved in processing, transportation and distribution, while the other is primarily on the production side.

Revenues for both continue to climb, demonstrating another advantage for our partnerships. Dividend distributions continue to advance rather than remain steady.

As the share prices climb, partnerships should continue to increase distributions rather than allowing their yields to slip, as is the case for many common stocks and Canadian trusts.

For investors seeking even more simplicity, we have two investment companies in partnerships structured to look like closed-end funds. One has a focus on energy infrastructure and the other in the capital resource market for energy. With a tradition of lower market volatility, the two-related funds should continue with solid dividends and steady performance.

Another area of cash flows involve heading into the great yonder. As airlines get more and more business, their planes need to be replaced and their fleets expanded, especially to take advantage of new fuel-saving technologies.

From American Airlines to its peers around the world, order books are being fattened and expanded. This is leading to an expansion in aircraft leasing companies. They're the ones that end up with the planes, which are, in turn, leased to the airlines.

Two have come to the market as LPs. Both are traded in the US but are based in Ireland. They lease planes to both passenger and cargo airline companies.

Revenues should ramp up nicely during the coming years, providing us with rising overall dividend distributions. Yields should continue to steadily increase, boosting share prices. One is currently generating dividends in the mid-8 percent range, while the other is running on a high-glide path, handing out around 8 percent.

The dividends flow from companies that are characterized by the IRS as Passive Foreign Investment Companies, which means you have two ways to file your taxes.

You can choose to declare that you'll treat them like any other domestic partnership, or what the IRS calls a Qualified Electing Fund (QEF). This means you'll pay taxes on dividend income using the companies' declarations of overall breakdown of income and return of capital.

The other possibility is to simply pay taxes on the dividends and the tax on the gains. Either way, these are good deals.

Back on the ground, we have two other partnerships in the Growth Portfolio. One is focused on the steady, lucrative sale and leaseback of prime commercial properties around the world. The other owns roadways, port facilities and other key logistical assets of basic infrastructure facilities.

Steady dividend flows in the mid- to upper-5 percent range and continued gradual gains are the keys for both partnerships.

Come and Chat

If you’d like to hear firsthand about some of our investments, particularly those in some of the more-interesting markets beyond the usual Wall Street fluff, join me on one or more of my upcoming conferences or travel opportunities--see below for the various opportunities available.

Head out to the East Coast, and join me and PF Associate Editors Roger Conrad and Elliott Gue at the Washington, DC, Money Show, Sept. 6-8, 2007. The conference will take place at the Wardman Park Marriott, located in downtown Washington DC. Click here to register for free. Be sure to tell them I sent you.

Noble palaces, historic villages, stunning natural vistas and indispensable, one-on-one conversation: I’ll be cruising down the blue Danube Sept. 8-16, 2007, along with PF Associate Editors Roger Conrad and Elliott Gue. You’ll have unfettered access to talk about your portfolio or any other topic that comes up as you take in Central Europe’s rich culture and historic beauty aboard the River Cloud, a “five-star floating hotel.” Interested in exploring Europe and your portfolio? Contact Joseph H. Conlin Travel Management toll free at 877-814-6502 or via e-mail at nycimpresario@mac.com to finalize your plans.

Farewell

Finally, while many are singing the blues to get past the crummy stock market, others are crooning more upbeat tunes because of the work of a man who died at 74 years. Those who love the work of Frank Sinatra and Tony Bennett can thank the composition of songwriter Ron Miller. His songs include the classic romantic hit, “For Once In My Life.”

If you’re interested in having me or one of my cohorts address any investment or professional groups, please e-mail me at bygeorge@kci-com.com with ideas or suggestions.

Neil J. George, Jr.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by e-mail at bygeorge@kci-com.com.