Royalty trusts can be great holdings for investors who want income that rises in sync with commodity prices. These trusts hold interests in oil, gas or mineral production and collect more income when energy prices rise, resulting in bigger distributions (similar to dividends) and high yields for their investors.
So far in 2018, royalty trust investors have benefited from a 12% improvement in sale prices for benchmark West Texas Intermediate (WTI) crude oil, which was recently trading at $67 a barrel. Prices are now up nearly 150% from their low of about $27 per barrel two years ago.
Royalty trusts typically offer high yields, frequently better than 7%. And many of these trusts have increased their distributions multiple times this year thanks to higher energy prices.
The principal drawback: Distributions decline over time because the trust’s energy reserves deplete; royalty income from oil and gas sales gradually drops to zero. Royalty trusts are required to disclose and annually update estimates of their remaining reserve life – though conservative estimates mean many trusts live on well past their expected termination date.
Royalty trust distributions also can move along with energy prices, which means they don’t just rise – they can drop, too. And that tax advantage comes with more complex tax reporting; investors sometimes must pay income taxes to multiple states if the trust’s assets are spread over several jurisdictions.
Still, royalty trusts’ high-income potential should earn them a spot in most portfolios. These 10 royalty trusts in particular offer high yields that fly far under Wall Street’s radar.