A royalty trust is a type of investment that pays out a portion of the profits from a specific asset or group of assets to investors. These assets can include oil and gas reserves, natural resources, real estate, and more. By investing in a royalty trust, you are essentially purchasing a share of the future revenue generated by these assets, which can provide a regular royalty income stream over time.
In this article, we’ll explore the top 10 best royalty trust and royalty stocks investments that can provide you with a steady stream of passive income. We will delve into the specifics of each trust, their history, and the assets they hold, to help you make an informed decision about where to invest your money for potential returns.
What Is a Royalty Trust?
A royalty trust is a type of investment that allows investors to collect a portion of the profits from a specific asset or group of assets. This type of investment typically involves natural resources, such as oil and gas reserves, but can also include real estate, patents, and more. Royalty trusts are designed to provide investors with a way to gain exposure to these assets without having to directly manage them.
Royalty trusts are typically structured as a pass-through entity, meaning they do not pay corporate taxes on their profits. Instead, the profits are passed on to investors in the form of dividends. This structure is advantageous for investors because it eliminates the double taxation that can occur when a corporation pays taxes on its profits and then distributes those profits as dividends to shareholders.
How Do Royalty Trusts Work?
Royalty trusts are created when a company sells its assets to a trust, which then distributes the profits from those assets to investors. The trust is managed by a trustee, who is responsible for collecting the profits and distributing them to investors. The trustee’s role is crucial as they ensure the smooth operation of the trust and adherence to its terms.
Investors can purchase units of the trust, which represent a share of the ownership of the assets. As the assets produce income, investors receive a portion of that income in the form of dividends. The amount of income an investor receives is typically proportional to the number of units they hold in the trust. This structure allows for a clear and direct way for investors to profit from the underlying assets.
Top 10 Best Royalty Trust Investments
- San Juan Basin Royalty Trust (SJT)The San Juan Basin Royalty Trust holds royalty interests in oil and gas properties located in the San Juan Basin in New Mexico. The trust was created in 1980 and has a long history of providing consistent dividends to its investors. The San Juan Basin is known for its abundant natural gas reserves, making this trust an attractive option for those looking to benefit from the energy sector.
- Permian Basin Royalty Trust (PBT)
The Permian Basin Royalty Trust holds royalty interests in oil and gas properties located in the Permian Basin in Texas. This trust has been in operation since 1980 and offers investors a high yield and consistent dividends. The Permian Basin is one of the most prolific oil-producing regions in the United States, which contributes to the trust’s potential for stable and substantial payouts.
- Hugoton Royalty Trust (HGT)
The Hugoton Royalty Trust holds royalty interests in oil and gas properties located in the Hugoton area of Kansas. This trust has been in operation since 1998 and offers a strong yield and consistent dividends to its investors. With its strategic location in one of the largest natural gas fields in North America, the Hugoton Royalty Trust provides investors with exposure to a key energy-producing area.
- Cross Timbers Royalty Trust (CRT)
The Cross Timbers Royalty Trust holds royalty interests in oil and gas properties located in the Arkoma Basin in Oklahoma. This trust has been in operation since 1991 and offers investors a high yield and consistent dividends. The Arkoma Basin has a long-standing history of oil and gas production, which has contributed to the trust’s stability and appeal to investors.
- Mesa Royalty Trust (MTR)
The Mesa Royalty Trust holds royalty interests in natural gas properties located in the Hugoton area of Kansas. This trust has been in operation since 1980 and offers investors a high yield and consistent dividends. The trust benefits from the extensive gas reserves in the area, which have been a reliable source of revenue over the years.
- Sabine Royalty Trust (SBR)
The Sabine Royalty Trust holds royalty interests in oil and gas properties located in Louisiana, Mississippi, and Texas. This trust has been in operation since 1982 and offers a strong yield and consistent dividends to its investors. The diverse geographical spread of its assets across multiple states provides a level of risk mitigation through diversification.
- MV Oil Trust (MVO)
The MV Oil Trust holds royalty interests in oil and gas properties located in Kansas and Colorado. This trust has been in operation since 2006 and offers investors a high yield and consistent dividends. Its assets in the Mid-Continent region of the United States are strategically positioned to take advantage of both current and future energy market opportunities.
- Chesapeake Granite Wash Trust (CHKR)
The Chesapeake Granite Wash Trust holds royalty interests in oil and gas properties located in Oklahoma. This trust has been in operation since 2011 and offers a strong yield and consistent dividends to its investors. The Granite Wash is an area known for its multiple stacked pay zones, which can provide multiple sources of production and potential income for the trust.
- ECA Marcellus Trust I (ECT)
The ECA Marcellus Trust I holds royalty interests in natural gas properties located in Pennsylvania. This trust has been in operation since 2010 and offers investors a high yield and consistent dividends. The Marcellus Shale is one of the largest sources of natural gas in the United States, making this trust an attractive option for investors seeking to capitalize on this resource.
- PermRock Royalty Trust (PRT)
The PermRock Royalty Trust holds royalty interests in oil and gas properties located in the Permian Basin in Texas. This trust has been in operation since 2017 and offers a strong yield and consistent dividends to its investors. Despite being a relatively new entrant, the trust’s focus on the prolific Permian Basin gives it a solid foundation for potential growth and profitability.
Benefits of Investing in Royalty Trusts
Investing in royalty trusts offers several benefits, including:
Passive Income
The main benefit of investing in royalty trusts is the potential for passive income. As the assets produce income, investors receive a portion of that income in the form of dividends. This can provide a steady stream of income without the need for active management. Passive income from royalty trusts can be particularly attractive for investors looking for regular cash flow, such as retirees or those seeking additional income streams.
Diversification
Investing in royalty trusts can also help diversify your investment portfolio. Royalty trusts are not directly tied to the stock market, so they can provide a hedge against market fluctuations. Additionally, because these trusts invest in physical assets like oil, gas, and real estate, they offer a tangible investment that can perform differently from stocks and bonds.
Potential for High Yields
Many royalty trusts offer high yields and consistent dividends, making them a potentially attractive investment for those seeking passive income. The high yields are often a result of the substantial revenue generated by the underlying assets. For investors seeking higher returns than what’s typically available from traditional fixed-income investments, royalty trusts can be an appealing option.
Reduced Risk
Since royalty trusts are structured as pass-through entities, they are not subject to corporate taxes. This can reduce the risk for investors and potentially lead to higher dividends. Additionally, because investors are not directly responsible for the operation of the assets, they are not exposed to the operational risks that a company might face, such as equipment failure or operational inefficiencies.
Risks of Investing in Royalty Trusts
While investing in royalty trusts can be beneficial, it’s important to consider the associated risks, including:
Volatility
Like any investment, royalty trusts can be subject to market fluctuations. This can lead to a decrease in dividends and potentially affect the value of your investment. The performance of royalty trusts is often linked to the prices of the commodities they derive income from, such as oil and gas. When commodity prices are volatile, the income and share price of the trust can be similarly volatile.
Limited Control
As an investor in a royalty trust, you have limited control over the assets. The trust is managed by a trustee, who is responsible for making decisions about the assets and distributing profits to investors. While this can be seen as a benefit for those who do not wish to manage these assets themselves, it also means that investors must trust the management team to make decisions that are in their best interests.
Distributions Not Guaranteed
While many royalty trusts offer consistent dividends, they are not guaranteed. The amount of dividends can vary depending on the performance of the assets. If the underlying assets fail to produce the expected revenue, the dividends paid out to investors can decrease. Additionally, because royalty trusts often deplete their assets over time, the income stream may decrease as the assets are exhausted.
Conclusion
Royalty trusts can be a valuable addition to your investment portfolio, providing you with passive income and diversification. By carefully considering the top royalty trust investments and understanding the associated benefits and risks, you can make informed investment decisions. Remember to conduct thorough research, assess your own financial situation, and consult with a financial advisor to ensure your investment aligns with your goals and risk tolerance.