In 1965, Paul McCartney wrote a song for the Beatles album
Since then this song has been rerecorded by other artists more
than 2,200 times, more than any other song in history.
As the story goes, when he sat down at the piano to write the
tune, he had a melody in mind. But he hadn't written the lyrics
yet. As a result, the working title for the song was "Scrambled
Once the lyrics were written, "Scrambled Eggs" became
"Yesterday," a No. 1 hit song and one of the Beatles' most
Today Sir Paul McCartney is a very wealthy man. Forbes
magazine estimates his net worth at around $650 million.
But here's where it gets interesting...
Every year, McCartney earns almost as much from another song,
"Wonderful Christmastime," as he does from the entire Beatles
Why? Because of his royalty agreements.
He wrote the lyrics and music and played all the instruments
on "Wonderful Christmastime." But more importantly, he kept his
rights to all the royalties. This one song, released in 1979, has
so far earned McCartney roughly $15 million. It continues to
generate $400,000 to $600,000 for McCartney every year.
While very few of us will ever write a hit song in our
lifetimes, there is another way we can use the wealth-building
power of royalties.
As investors, we can invest in a unique type of business
called royalty trusts.
A royalty trust is a corporation created to act as the owner
of the mineral rights to wells, mines and similar properties. It
exists only to pass income generated from the sale of the
property's assets (gold, oil, etc.) to shareholders.
No income tax is paid at the corporate level as long as the
bulk of income (at least 90%) is passed through to shareholders
in the form of distributions or dividends.
As a result, royalty trusts offer investors yields that are
generally higher than those offered by stocks and bonds.
SandRidge Mississipian Trust (
is currently yielding 18% and is trading near an all-time
SandRidge Mississippian Trust owns a royalty interest in oil
& natural gas properties leased by
SandRidge Energy (
. It's entitled to 90% of the proceeds received from sale of oil
& gas production attributable to SandRidge's net revenue
So what gives? By looking at the chart alone, the company
looks like a disaster.
Well, the underlying company, SandRidge Energy, has had a
rough time over the past several years. This parent company has
been divesting what some analysts consider prime assets and
running up a boatload of debt.
And there has recently been a revolt among board members and
shareholders at SandRidge over the tenure of former CEO Tom
After Ward was fired this summer, Forbes called Ward's $90.9
million severance package "one more giant black mark against the
American system of
" and said his tenure as CEO "gives 'paid to fail' a whole new
Harsh words. But here's the failure they're talking
Since Ward brought SandRidge Energy public in 2007 its stock
value has fallen over 80%. And since the June 2008 all-time high
of nearly $70 there has been over a 92% depreciation of the
But here's the thing...
While SandRidge Energy has been getting a lot of bad press,
Sandridge Mississippian Trust has been doing quite well.
The trust was formed in December 2010 and owns royalty
interests in oil and natural gas properties owned by Sandridge
Energy in the Mississippian formation. (The name is a bit
misleading, as the properties owned by the trust are not in the
state of Mississippi. The wells are spread throughout five
counties in Oklahoma.)
The trust delivered strong performance in this year's second
quarter, with volume up 20% over the previous quarter and almost
90% year over year.
The year-end 2012 reserves value (assets still in the ground)
of SDT was $508.3 million. Yet the current enterprise value of
the company is only $374 million.
Another remarkable set of metrics are SDT's return on assets
(ROA) and return on equity (ROE). Over the past 12 months, the
company has boasted a 28% ROA and 28% ROE, compared with an
industry average ROA of 2% and an ROE of 4%.
Based on these numbers, fair value for SDT should be around
$18 a share -- roughly 30% upside from today's share price of
Recently, Forbes noted that shares of SDT had entered oversold
territory. In other words, the negative headlines are already
baked into share prices. New management is in place, and the
sellers have sold. I don't see too much downside risk at these
Risks to Consider:
Like all trusts, SDT's assets are finite and will run out
eventually. Although analysts predict that SDT's assets will last
for at least the next decade, the trust will eventually be
dissolved. This is not a stock you can hold "forever."
The tax implications of investing in royalty trusts are
complicated. Distributions from U.S. trusts are taxed as
regular income rather than at the lower 15% dividend tax rate,
and investors may have to file tax returns in the states where
the trust operates.
Action to Take -->
Buy at today's price and set a target for $18 over the next 12
months. Collect an 18% dividend while you're waiting.
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