Wednesday, October 27, 2010

Plenty of Oil Income Royalty Trusts Yielding Over 5.5%

Over the last month, the price of crude oil has increased from $77 a barrel to $82 a barrel, an increase of 6.5%. Income investors that want exposure to oil and gas have many options. Several of the multinational oil companies have decent yields, such as Exxon Mobil Corp. (XOM) with a 2.7% yield and ConocoPhillips (COP), which has a 3.6% yield.

However, for the really high yields, investors have to turn to the oil income royalty trusts and the oil master limited partnerships or MLPs. In both cases, income generated avoids double taxation; virtually all earnings are passed through to the shareholders without being taxed at the company level.

Of these options, the royalty trusts have many advantages over the partnerships. Limited partnerships don't send out 1099 forms, they send out a Schedule K-1 Form, and the income is reported on your tax return differently from regular dividends, with additional forms and preparation time involved. In addition, you should never put an MLP into a retirement plan because of the UBTI or Unrelated Business Taxable Income problem, which could put the tax deferred status of your retirement plan in jeopardy, based on my understanding. However, since I am not an accountant, I am not giving tax advice so please discuss MLP's with your accountant or CPA for clarification, before investing in MLPs.

The royalty trusts don't have this problem as they send out 1099's on their income distributions, similar to dividends. According to a list just developed at, there are nine different oil royalty income trusts with yields ranging from 5.7% to 13%. For example, Cross Timbers Royalty Trust (CRT), with a price to earnings ratio of 15, sports a yield of 8.1%. This trust owns 90% net profits interests in many royalty and overriding royalty interest properties in Texas, Oklahoma, and New Mexico. Distributions have been paid monthly since 1992.

Sabine Royalty Trust (SBR), founded in 1982, receives royalties from oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The stock has a PE ratio of 17 and a yield of 7.3%. This trust also pays monthly.

When you check out the free list of oil income investments at, pay close attention to the last column, which shows the company structure, either limited partnership, trust, or LLC.

Disclosure: Author does not own any of the above.


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