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Investing in U.S. Royalty Trusts

By Edited Jan 19, 2016 0 0


In todays uncertain times, more and more investors are looking for new ways to invest their money. People are looking for safe investments that give tons of dividends. Royalty Trusts, are investment securities that fulfil such a need. 

What are U.S Royalty Trusts

Royalty trusts are investment vehicles that help get income from corporations to investors with only 1 tax, which is the individual income tax. U.S Royalty Trusts are corporations that usually have a certain number of years, it will run until it will stop producing income.  Unlike regular corporations, Royalty Trusts do not reinvest their income back into the company, instead 90% or more of the corporations profits, are distributed to the investor in the form of dividends. Royalty trusts usually are involved in the production of Oil and gas, or other natural resources. Royalty trusts do not produce resources such as oil and gas, instead they collect the royalties/income and distribute them.

   In the U.S Royalty Trusts can have no employees. The Trusts, generally do not own land, they usually lease the mining rights to land. Royalty trusts can be bought and sold on a public stock exchange such as the NYSE. The Trusts usually have low volatility.

 

How to invest

To invest in royalty trusts, you need access to the stock exchange, meaning you need a brokerage account. Brokerage accounts are pretty easy to get and allow investors to put their money in all sorts of securities such as bonds,annuities,stocks and even plain old cash.

What To Buy

Not all Royalty Trusts are created equal, some trusts can lose you money. For instance a while back I bought a trust called Hugoton Royalty Trust, or HGT for short. I had the trust for a while and was receiving steady income in the form of dividends, then a law suit erupted and the trust  price, dropped off a cliff. I lost a lot of money on the trust, which is why it is very important to do research before buying a trust. Since trusts don't reinvest their income back into the corporation, they have a finite life span meaning eventually the trust will be disbanded due to the death of a trustee or a lack of resources. Eventually the royalties from the mining operations halts and the trust becomes worthless. This is why it is important to know how the trust is doing, how many years the trust has left. You might find that the trust is coming near it's expiration date, because they announce it, sometimes based on the amount of resources they are mining you can see a trend that shows decreasing reserves. One thing you never want is to be stuck with a losing trust. Once you see signs that in the near future(1-3 years)that the trust will stop producing royalties get out. Once other people see that the trust is coming to a halt, they will jump the fence so to speak. This is why I advise buying trusts that are newly created. By investing in newly created trusts you can ensue  that there is going to be no shortage of resources to mine for a while.

 When investing in trusts, you are essentially investing in oil,gas,iron or whatever is being produced. This means that if you invest in an oil trust and the price of oil rises, you will be affected. Your royalty payments might increase, but also if oil went down, you could see a drop in your royalties. This is something you should consider when investing.

   Most of the royalty trusts in the U.S are involved in the oil/gas business, below I have listed a few U.S royalty trusts, I also listed the type of commodity they receive royalty payments from.

  • BP Prudhoe Bay Royalty Trust: Crude oil
  • Dominion Resources Black Warrior: Natural gas
  • Mesabi Royalty Trust: Iron Ore
  • Mesa Royalty Trust: Natural gas and gas liquids
  • VOC Energy Trust: Crude oil
  • Sandridge Mississippian Trust I: Natural Gas and crude oil
  • San Juan Basin Royalty Trust: Natural Gas and crude oil
  • Sabine Royalty Trust: Natural Gas and crude oil

 

U.S Royalty Trusts are corporations, that allow investors to earn royalties from resource producing land. These trusts are very popular investments among many people. I highly recomend investing in them. 

 

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