Oil and gas are classic boom-and-bust industries, and last year, they played to form: In midsummer of 2008, the prices in this space were setting gravity-defying records. By year's end, however, gravity finally brought them plunging down, and they remained depressed through early 2009.

The dividend world, on the other hand, had generally been a steady-as-she goes place until the recent financial crisis created a bust cycle where seemingly impregnable dividend payouts from the likes of financials, automakers and other corporate stalwarts have vanished or been slashed.

So where are income investors to go for fat yields now? Perhaps it's in that same tempestuous oil and gas patch. Specifically, it may be found in high-yielding royalty trusts and master limited partnerships (MLPs).

These publicly traded vehicles are predominately tied to natural resources (particularly in oil and gas), and they pay tax-advantaged and often sizable distributions to investors. The recent yields from these investments were in the 8% to 15% range, more or less.

In the U.S., royalty trusts are passively managed entities overseen by banks. They don't actually dig or drill. Instead, they own the mineral rights to mines and wells, and they depend on others to extract the resources from the ground. By law, they must pay out 90% of their cash flows and provide depletion deductions to investors (who own units, not shares, and are called "unit-holders.") The distributions are taxed as income, but the return of capital portion is actually an allowance for depletion and depreciation that decreases an investor's cost basis. And taxes on that portion of the distribution are tax-deferred until the units are sold.

MLPs, meanwhile, are structured as partnerships, meaning they avoid corporate income taxes. Instead, they pay taxes only on the distributions. Investors buy units and become limited partners who receive quarterly distributions that typically amount to 90% of the MLP's generated income as required by tax law. Distributions are taxed as ordinary income.

Generally, MLPs get their money from transporting and processing natural resources, while royalty trusts collect cash from extracting resources from the ground. (There are some MLPs tied to exploration and production, too, a category known as E&P MLPs.)

Plugging a Hole
Some advisors believe these investments can be a good income play in the current environment. Troy Smith, a certified financial planner in Raleigh, N.C., uses MLPs for some of his clients as an "income repair" tool to make up for market declines that have eaten into the principal of his clients' portfolios.

"If you're taking a 4% distribution from a portfolio and 3½% came from a yield and the rest from principal, it's easy to move that part of the portfolio to something with a fatter yield," Smith says. So that his clients can reduce their reliance on principal for retirement cash flow, Smith uses MLPs along with preferred stocks and funds, high-yield funds, closed-end funds and the like.

"A lot of investors are waiting around for the market recovery, and it's a silly strategy to sit there and hope for upside," Smith says. "Here, you can get compensated for waiting. That reduces your overall risk."

Of course, MLPs and royalty trusts aren't risk-free. As publicly traded vehicles tied to volatile commodity prices, their share prices got whacked when oil and gas prices tanked last year. According to IHS Herold, an energy research firm in Norwalk, Conn., U.S. royalty trusts as a group lost 20% and MLPs dropped 28.3% in 2008, while Canadian royalty trusts, a different animal from their American counterparts, sank 34.4%.

Yields have increased as unit prices have dropped, but a better gauge to look at is the sustainability of the distributions in the face of weak underlying commodity prices. Some investors favor MLPs because their cash flows stem from stable business activity based in fees-business such as the movement of oil and natural gas through pipelines, for instance-and such activities aren't hurt as much by fluctuations in raw material prices.

"I much prefer companies that are transporting oil and gas because the cash flows they throw off are generally consistent," says Josh Peters, an equity strategist at Morningstar who also edits the company's Dividend Investor newsletter. "When you're looking at yields of 8% to 11%, the yields are sustainable because you're getting a return on moving these assets around and that's not likely to change."

Some of Peters' favorite MLPs recently were Magellan Midstream Partners, Kinder Morgan Energy Partners and NuStar Energy. Magellan, formerly known as Williams Energy Partners, operates pipelines and storage terminals for refined petroleum and ammonia in the central U.S. The equity price tumbled 23.6% last year, but in 2009 it gained roughly 19% by mid-February, with a yield of 8%.

Kinder Morgan, which owns more than 25,000 miles of oil and natural gas pipeline, saw its equity price drop 9% last year before it rebounded more than 12% through mid-February. Its yield was more than 8%.

One of the reasons Peters likes NuStar Energy-a spin-off from refiner Valero Energy-is that it now has an asphalt refining business to go along with its oil pipeline operations. Its stock lost 16.4% last year but was recently up about 20% this year, and the yield was nearly 9%.

Quirky Considerations
MLPs, however, are not a good fit for retirement accounts such as 401(k)s and IRAs because the partnership income they throw off often exceeds the $1,000 that may be considered unrelated business taxable income-and then becomes, as the name implies, subject to tax. "That's part of the reason why they're not included in pensions," says Michael Ling, a certified financial planner at Berkeley Inc., a registered investment advisor in Boise, Idaho.

But Ling says closed-end funds such as the Energy Income & Growth fund-whose holdings include Magellan Midstream, Kinder Morgan and NuStar-give investors the same benefits as MLPs but without the tax consequences in the retirement accounts.

Also, not all MLP partnership units are equal. As distributions rise, the general partner often gets a disproportionate share of total distributions as an incentive. That's a turnoff for some, but not all.

"You can view it as a risk, but it's really a cost," says Troy Smith, the Raleigh planner. "It's not a problem if unit-holders are getting compensated enough."

In Royalties We Trust
Some investors prefer royalty trusts. "We're respectful of MLPs and we own them in a balanced way," says Russell Lucas, co-founder and portfolio manager at Lucas Capital Management, an RIA in Red Bank, N.J., that runs energy-focused hedge funds and private equity funds. "But we've always felt that royalty trusts are a better core investment and MLPs more of a short-term bond alternative."

One of the knocks against royalty trusts is that they're depleting assets that one day will turn into useless dry holes. It's a greater risk for U.S. royalty trusts, which by law can't make acquisitions after they're created.

Canadian trusts, on the other hand, are actively managed businesses that can buy other properties, raise and borrow money, and manage their own resources.

One of the key factors to consider with oil and gas royalty trusts is their depletion rates, Lucas says. He cites new technologies that have boosted production and extended the life of wells. Seismic studies have improved, gas shales can be "fraced" (or fractured) and wells can be flooded with water that helps float the oil or wash it from adhering to the rocks.

"The hidden secret is understanding the opportunity of each trust and looking for the catalyst enabling for a longer-than-expected life span," Lucas says.

One of Lucas' top picks is Enterplus, a Canadian trust with a history of paying attractive yields and which currently pays about 10%. "Reinvestment of dividends can provide an attractive total return in periods of flat commodity pricing," he says.

Lucas says that even after two or three rounds of distribution cuts due to falling oil prices, most trusts are still paying distribution yields in the 10% to 15% range.

Either, Or
Royalty trusts are viewed more as a pure commodity play because they're more closely tied to the price of their underlying assets. But rather than trying to guess market prices, some advisors use both MLPs and royalty trusts to cover their bases. "We're using MLPs and royalty trusts together as a diversification tool," says Ling. "We're not trying to time one or the other."

Ling says his firm places great emphasis on cash flow when constructing portfolios. He says that with dividend flows not as prevalent as they once were, MLPs and royalty trusts allow you to increase cash flows in your portfolios while at the same time helping you curb volatility.

But sometimes Ling has to do a little explaining to get people comfortable with investing in MLPs. "The first thing they focus on about MLPs is the limited partnership component," he says. "They might have a problem with that." That's because older investors might remember the troubles associated with various partnerships during the 1980s-specifically the tax-shelter partnerships that lost investors money after the IRS cracked down on them.

Among Ling's favorite MLPs are Enterprise Product Partners, a Houston-based outfit with natural gas pipelines and processing plants mainly focused along the Gulf Coast. The stock lost 30% last year, but had gained nearly 12% through mid-February. It also sported a yield of more than 9%.

Another top pick is Suburban Propane, a distributor of propane fuel oil and other refined fuels whose stock was up 11% after dropping a slight 5% in 2008. Its recent yield was more than 8%.

Among royalty trusts, Ling favors Cross Timbers Royalty, which is not a play on wood, in spite of its name, but a play on oil and gas wells in Oklahoma, Texas and New Mexico. The stock fell 28% last year, was recently up 9% this year, and yielded about 9%.

Many analysts believe that long-term energy supply-and-demand trends should support higher prices once the global economy finally recovers. If you buy into that scenario, MLPs and royalty trusts might be a way to put money in your pocket while waiting for the rebound.