In this article, I’ll cover exactly what a royalty income trust is, outline the criteria that qualify a firm as a RIT, list and describe the benefits of holding RIT stocks, analyze the hazards of owning RIT stocks, and present a list of all RIT stocks currently listed on the stock exchange.
What is a Royalty Income Trust (RIT)?
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What is a Royalty Income Trust?
A royalty income trust is a type of investment trust that provides investors with exposure to a specific sector or industry – usually the energy sector – through royalty streams generated from the production of commodities from specific energy assets.
These trusts typically own a portfolio assets that generate royalty payments. In exchange for investing in the trust, investors receive regular distributions of the royalty payments received by the trust.
Royalty income trusts are structured as a sort of pass-through organization comparable to real estate investment trusts (REITs) and master limited partnerships in structure (MLPs).
They avoid paying federal income tax as long as they transfer a specified amount of earnings to unit holders as distributions.
A trust’s distributions are often considered as a return of capital, which means they are not taxed. Instead, dividends diminish a unit holder’s cost basis, deferring taxes until the unit holder sells his stake in the trust.
Qualifying Criteria for Royalty Income Trusts
To qualify as a royalty income trust, a company must meet some specific criteria…
Firstly, the company must have a diversified portfolio of royalty streams generated from intellectual property or other assets.
Secondly, the company must distribute at least 90% of its taxable income to investors in the form of dividends.
Thirdly, the company must be organized as a trust, and the trust must have a minimum of 100 shareholders.
Benefits of Owning RIT Stocks
Owning stock (or ‘units’) in a royalty income trust can offer several benefits to investors seeking passive income.
Firstly, they typically offer higher yields than traditional stocks.
Secondly, these trusts often pay dividends more frequently, providing investors with a steady stream of income.
Thirdly, royalty income trusts offer some tax advantages because the IRS doesn’t recognize their dividends distributions as taxable events.
Finally, they offer diversification benefits, as they typically hold a diversified portfolio of royalty streams.
Risks of Owning Royalty Income Trusts
Like any investment, these stocks come with risks…
Firstly, the cash flows from royalty income trusts are usually contingent on the production of energy commodities. As such, the level of income received can be volatile as commodity prices, production levels, and production costs all vary wildly.
Also bear in mind that royalty trusts do not have any physical operations. They are simply shell companies incorporated by banks purely to finance specific projects.
As a result, unitholders in the trust are one step removed from the actual operational energy companies behind the trusts.
This means that – unlike traditional shareholders – investors in a trust have little to no influence over operational decisions that may affect the company.
Another consideration is that some royalty income trusts own intellectual property.
In those cases, the trust could be subject to changes in intellectual property laws, which can impact the value of the assets held by the trust.
Finally, RITs are still subject to market risks, such as interest rate fluctuations, currency risks, and overall market volatility.
List of RIT Stocks
Here is a list of royalty income trust stocks, along with a brief description of each company:
Permian Basin Royalty Trust (PBT): Permian Basin Royalty Trust is an oil and natural gas royalty trust. The Company owns overriding royalty rights in mineral properties in the United States.
Mesa Royalty Trust (MTR): Mesa Royalty Trust is a grantor trust. It holds interests in various oil and gas producing properties in the United States.
Cross Timbers Royalty Trust (CRT): Cross Timbers Royalty Trust operates as an express trust in the United States.
Altius Minerals Corporation (ALS.TO): A diversified mining royalty company with a portfolio of royalty interests in copper, zinc, and other base metals.
Marine Petroleum Trust Units Of Beneficial Interest (MARPS): Marine Petroleum Trust is engaged in the administration and liquidation of rights to payments from oil and natural gas leases in the Gulf of Mexico.
Mesabi Trust (MSB): Mesabi Trust operates as royalty trust in the United States, which produces iron ore pellets.
BP Prudhoe Bay Royalty Trust (BPT): BP Prudhoe Bay Royalty Trust was formed for the purpose of owning and administering the royalty interest.
Freehold Royalties Ltd. (FRU.TO): A Canadian oil and gas royalty company that owns a portfolio of mineral and petroleum royalty assets.
Gibson Energy Inc. (GEI.TO): A Canadian oil and gas infrastructure company that owns a portfolio of oil and gas transportation and storage assets.
Invesco DB Oil Fund (DBO): An exchange-traded fund (ETF) that invests in futures contracts on crude oil.
Pacific Coast Oil Trust (ROYT): A trust that holds net profits interests in oil and gas properties located in California.
PermRock Royalty Trust (PRT): A trust that holds net profits interests in oil and gas properties located in the Permian Basin of Texas.
San Juan Basin Royalty Trust (SJT): A trust that holds net profits interests in oil and gas properties located in the San Juan Basin of New Mexico.
Permianville Royalty Trust Trust Units (PVL): Formerly named Enduro Royalty Trust, this trust that was formed to own a net profits interest from the sale of oil and natural gas production from primarily non-operated assets in the States of Texas, Louisiana and New Mexico as well as unconventional assets in the Permian and Haynesville basins
Sabine Royalty Trust (SBR): A trust that holds overriding royalty interests in oil and gas properties located in Texas, Louisiana, Mississippi, Oklahoma, and New Mexico.
Texas Pacific Land Trust (TPL): A land trust that owns a significant amount of land and mineral interests in West Texas.
VOC Energy Trust (VOC): A trust that holds net profits interests in oil and gas properties located in Kansas and Texas.
Whiting USA Trust II (WHZT): A trust that holds net profits interests in oil and gas properties located in the Rocky Mountains and Mid-Continent regions of the United States.
Conclusion
Royalty income trusts offer a unique investment opportunity for investors seeking passive income.
There are several benefits for unitholders, including higher than average yields, more frequent dividend payments, some distinct tax advantages, and the benefit of diversification.
However, as with all publicly traded investments (and investment in general) these unique equities come with their own set of risks, particularly exposure to volatile energy markets, commodity prices and operational issues, as well as general market risk.
As always, it is important to carefully consider these risks and benefits in the context of your own financial circ*mstances, investing goals, wider portfolio, and tolerance for risk before investing in royalty income trusts.
References
Stock Market MBA – List of Royalty Income Trusts
Investopedia – What is a Royalty Income Trust
World of Dividends – Royalty Trusts: Why Most Dividend Investors Should Avoid Them
