Asset Focus: Royalty Income Trusts

Royalty income trusts can be a useful tool for income focussed investors. They have some interesting tax breaks, and pay their unitholders monthly income. But these natural resource investments can be volatile and risky. Confused? There’s no need. Here is our quick one stop guide to investing in royalty income trusts.

What Are Royalty Income Trusts?

These special purpose vehicles are used by owners of energy producing assets to sell their forward production for a good price. These assets can include oil wells, coal mines, natural gas deposits and renewable energy assets.

Selling their future production to a trust for a pre-agreed price provides the asset owner with stable, predictable future cashflow. At the same time, profits from production are distributed to trust unitholders in the trust. The trust takes the risk of volatile commodity prices and potentially rising production costs in exchange for potential for bigger profits for unitholders due to rising commodity prices.

A Royalty income trust distributes profits from energy production to unitholders with some additional tax breaks

Royalty trusts also enjoy some specific tax breaks. The IRS does not tax their distributions as actual income. Instead, unitholders pay a lower rate of capital gains tax when they sell their stock. There may also be further tax advantages for unitholders if the trust earns income from renewable energy production.

This combination of regular monthly income and tax advantages makes income trusts a potentially very interesting investment for income-focussed investors. They can be especially useful if tax planning is a particularly high priority. That said, these kinds of investments can be very risky, and we’ll talk about that shortly.

How to Invest in Royalty Income Trusts

There are many royalty trusts that are publicly traded on stock exchanges. So, you can buy units in a trust in the same way as any other stock. You can use one of the many online trading platforms that provide easy access to the whole market.

The number of royalty income trusts fluctuates as old trusts are liquidated and new ones launched

List of Royalty Income Trusts

The number of royalty income trusts available on public stock exchanges changes all the time. When the underlying energy assets of a trust eventually deplete, the trust is liquidated. In the same manner, new royalty trusts are launched all the time. As such, there is no one true definitive list of royalty income trusts.

Here is my list of 8 royalty income trusts available at the time of writing (August, 2021):

  1. Sabine Royalty Trust – SBR
  2. Mesabi Trust – MSB
  3. Permian Basin Royalty Trust – PBT
  4. San Juan Basin Royalty Trust – SJT
  5. BP Prudhoe Bay Royalty Trust – BPT
  6. PermRock Royalty Trust Trust Units – PRT
  7. Permianville Royalty Trust – PVL
  8. Mesa Royalty Trust – MTR

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Investment Returns for Royalty Income Trusts

The unit price of royalty income trusts tends to track oil and gas prices. When prices fall, the trust share price will fall also. Likewise, when oil and gas prices rise, so too will the unit price of most trusts. Most investors view these trusts as income investments. They are typically known for paying higher yields than other stocks.

Of course, the global pandemic of 2020 impacted oil and gas prices and production very badly. So 2020 was not a great year for royalty income trust investors. But as the global economy starts to creak back into life, these investments are performing better. In fact, the energy sector is one of the best performing of 2021 so far!

Investment returns depend largely on oil and gas prices and production levels

Thanks to the global rollout of vaccination programs, and limited production by OPEC and Russia, oil prices have risen to their highest in 3 years. At the same time, the price of  natural gas in the United States is at a 2.5-year high.

With all that in mind, it is understandable that investments in energy production are doing quite well. For example, San Juan Basin Royalty Trust  has delivered annualized yields of 8.23% in 2021. And Permrock Royalty Trust is right up there as well with annualized distributions equating to 6.2% by mid-2021.

Are Royalty Income Trusts Risky?

Investing in royalty income trusts is not for the feint of heart. As a unitholder, your income is dependent on oil and gas production levels, commodity prices and production costs. All of these can swing up and down wildly, and so your returns can be very volatile.

Royalty trusts can be very volatile and potentially risky investments

As with any investment, diversification is key. You should not invest an amount in any one investment that you cannot afford to lose. While every investors circumstances are different, royalty income trusts usually make up only a small part of a diversified investment portfolio.

Conclusion and Resources

Informed investors make better decisions. If you want to learn more about royalty income trusts, you can further your research using the following resources: