Cash in Hand
High Energy Income
Energy royalty trusts trade like REITs or stocks but offer a much higher yield. To energize the income side of your portfolio, look at these five names.
By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance
June 2005
I don't have the energy-investing bug because oil is at $59 a barrel and natural gas is near a record, even adjusted for inflation. No, I have it because of royalty trusts.
Three years ago, when REITs were the hot ticket, a couple of financial planners told me they prefer to diversify income portfolios beyond real estate. Their chosen means to this end was the publicly traded energy royalty trust.
Royalty trusts trade and are priced in units, like shares of stock. You own a piece of a trust whose assets are a financial interest in oil and gas wells or leases. You receive royalties (think monthly dividends) from the sale of the oil or gas, so your income varies with both the piece of energy and the output. Most of it is regular taxable income, but some is tax-deferred because of deductions for depletion allowances or because it's a return of capital.
Yes, when the price of the units gets high, the percentage yield falls. But the distributions are still so generous that even without tax help, these are worth owning.
Overlooked opportunity?
That still leaves a mystery, and it is this. Real estate is so popular that the yield on REITs has fallen to 4%. Why hasn't the same thing happened to the energy trusts? It's not like it's a secret that oil and gas have been good investments.
I asked some mutual fund managers and investment advisers and they could only surmise that the category is overlooked. I'm not sure I buy that totally, but whatever, you can still get a decent yield here and then sell on a moment's notice if you think energy is going to collapse. But, a warning: Three months ago oil was well below $50, and there was a temptation to run for the exits. Now, oil is back to $55, so selling would have been enormously premature -- especially if you are in this for the income.
Who are these guys? Perhaps the leading name and one of the largest is San Juan Basin Royalty Trust (SJT), which yields a little less than 8%. It owns interests in gas leases in the southwestern U.S.
Another popular choice is Enerplus Resources (ERF), which yields 9% from a diversified collection of Canadian oil and gas fields. It is a Canadian company, which means Canada will withhold 15% for tax on your dividends, but you can get it back by claiming a credit on your U.S. taxes.
Permian Basin Royalty Trust (PBT), Hugoton Royalty Trust (HGT) and Cross Timbers Royalty Trust (CRT) are also experienced and reliable.
Nobody can be sure that one trust or another won't suffer from a production accident that might interrupt dividends, so it's best to own at least three of these if you're interested.
