A royalty trust is a type of corporation usually based in the United States or Canada. In general, trusts usually own oil and natural gas wells, rights to wells or rights to the mineral deposits. Royalty trusts are similar to real estate investment trusts (REITs) as they are tax free if they payout 90% of income to shareholders. Most royalty trusts trade on major US stock exchanges. Others trade in Canada and have a pink sheet listing in the US.
So many corporations were using the trust advantage that Canada changed the regulations starting January 1 2010. This will force some trusts to convert into a regular corporations which will lower their dividends. However, this does not lower their status as monthly income stocks.
Non-Canadian investors owning a Canadian royalty trust is subject to a foreign income tax of 15% of payouts. This 15% tax can be claimed on US taxes from a Form 1099. This makes Canadian royalty trusts better investments for taxable accounts in the US. In non-tax accounts such as an IRA, you will be double taxed by Canada upon distribution date and US when funds are withdrawn from the IRA. The US royalty trusts do not have a 15% foreign tax so they can be held in tax-deferred accounts.
Over the last six months, there has been a significant quest for high yield investments. This has decreased the yields on trusts from double digits to single digits because of the increase in share prices. This lessens the appeal of royalty trusts at time. It would be better to patiently wait for a market correction to initiate a new position.
Here is one to consider:
Cross Timbers Royalty Trust
MARKET VALUE: $91.7 million
DISTRIBUTION YIELD: 9.9%
Cross Timbers Royalty Trust (CRT, $15.09) has existed since 1991 and earns royalty income from Texas, Oklahoma and New Mexico drilling properties. Most of the trust properties are located in the prolific San Juan Basin and all are owned and operated by the XTO Energy subsidiary of Exxon Mobil (XOM). Production comes from 4,900 oil and gas wells spread across nearly 60,000 acres.
Reduced gas production and higher development costs in 2017 caused trust distributable income to decline by 5% to $6.05 million, or $1.009 per share. Production volume and the monthly distribution have been erratic in 2018. Cross Timbers has paid out 82.5 cents per share to investors through seven months. As long as the average holds steady, CRT should pay out roughly $1.41 – a 9.3% yield that’s actually less than the projected forward yield using the most recent distribution.
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