The fact that oil and gas trusts have some of the highest yields on the market makes them desirable investments for income investors. They offer a distinct distribution each month, which is quite unpredictable because of the swings in the price of oil and gas, in comparison to the well-known oil majors like Exxon Mobil (XOM) and Chevron (CVX). Therefore, before buying these equities, investors should consider whether the trusts’ current large payouts are long-term sustainable.
Royalty Trusts Trade Like Stocks
Like master limited partnerships (MLPs), oil and gas royalty trusts make investments in the energy and commodities industries. However, unlike MLPs, royalty trusts earn money from the actual extraction of natural resources like coal, oil, and natural gas; as a result, the cash flows from royalty trusts are highly erratic as a result of fluctuations in commodity prices, and production levels.Â
Royalty trusts have no management, no staff, and no physical operations. Royalty trusts, on the other hand, are just financing vehicles managed by banks that trade like stocks. The resources are mined by a different company, which then pays the trust royalties.
How to Invest in Royalty Income Trusts?
Many royalty trusts are listed for public trading on stock exchanges. So, just like any other stock, you can purchase units in a trust. One of the many online trading platforms that offer easy access to the entire market is available to you.
Royalty income trusts’ unit price often follows the price of crude oil and natural gas. The trust share price will fall along with falling prices. When oil and gas prices rise, most trusts’ unit prices do as well. These trusts are typically seen as income investments by investors. Generally speaking, they are known for offering larger yields than other equities.
There are several unique ways to invest in royalties. One of those is resource-focused Loyalty Companies.
Resource-Focused Loyalty Companies
Oil and gas royalty trusts are one way that most people try to invest in resource-focused royalty companies. Because they aren’t companies, oil and gas trusts are unique. To raise capital, companies typically issue units of a royalty trust on the open market. Investing in royalty trusts typically yields significant returns and offers certain special tax advantages. Because they are pass-through corporations and their distributions are viewed as capital gains, these trusts are excluded from corporate taxes and are consequently subject to a lower tax rate.Â
As a joint owner of the oil wells, you may be eligible for tax credits due to asset depreciation. Taxes may be postponed, and the cost basis reduced as a result.Â
Minerals and the mining sector are also considered natural resources. Popular oil and gas trusts include the Sandridge Mississippian Trust II (OTC:SDR) and the BP Prudhoe Bay Royalty Trust (NYSE:BPT). Â
The Sum Up
For income-focused investors, income trusts may be a particularly appealing investment because of their consistent monthly income and tax benefits. Summing up, they may be particularly useful if tax planning is a top priority.
