As I´ve started to track all of the daily dividend increases and built the DDI portfolio, I´ve come across an interesting trend.
That is, when a dividend increase isn´t an increase at all.
The Secret of Royalty Trusts
If you look through the daily updates that I post to the 2012 Daily Dividend Increase spreadsheet, you´ll notice from time to time that I mark some of the ticker symbols with an asterisk (*). The companies that I mark this way are mostly Royalty Trusts – these are trusts that are setup for the purpose of distributing the royalty income generated from the sale of oil, natural gas and other commodities.
Since the price of commodities such as oil and gas fluctuate on a daily basis, this means that the income generated by these trusts varies from month to month as more or less oil/gas is recovered at the then current price for those commodities. As a result, some months the trust pays more, other months less. Because these shares show up in the daily report for stocks with ¨dividend increase announcements¨ I choose to include them in the DDI report – however, you shouldn´t be surprised when any of these trusts reduce their monthly payout.
Good news and bad…
There are many reasons for owning shares of Royalty Trusts – some investors seek them out for their tax consequences, others for their monthly income stream and some just as a hedge against the price of oil. Just know that before buying shares that your payout amount *WILL* fluctuate from month to month.
There are also other issues that should be considered before buying a Royalty Trust such as the amount of reserves remain in the trust – that is, how much oil or gas is left in the ground before the well runs dry – and the trust value goes to zero. Also, because these trusts don´t report income as dividends it may make completing your annual tax return a bit more complicated. If you understand these implications however, there may be additional benefits to holding these shares besides just the monthly income stream.
Here´s a brief list of a few of the Royalty Trusts that have reported payout increases:
- Sabine Royalty Trust – ticker: SBR
- San Juan Basin Royalty Trust – ticker: SJT
- Cross Timber Royalty Trust – ticker:CRT
- BP Prudhoe Bay Royalty Trust – ticker: BPT
- Mesa Royalty Trust – ticker: MTR
Have a question or comment about Royalty Trusts? Leave me a comment below – I always enjoy hearing from my readers!
Here´s to your investing best buys!