Last week, I told you about
Chesapeake GraniteWash Trust (NYSE:
paying a double-digit
Royalty trusts boast some of the highest yields on the
-- typically 6% to 8%, but payouts north of 10% aren't uncommon.
And aside from writing generous paychecks every quarter, many of
these securities have also delivered triple-digit share price
One of the best examples of what these securities can do is
BP Prudhoe Bay Royalty Trust (NYSE:
This trust operates in the Prudhoe Bay oil field located on the
North Slope in Alaska -- the largest oil field in North America.
The field covers 213,543 acres and is responsible for about 10% of
the United States' total oil output.
If you owned BPT, you'd own royalty interests in 150,000 acres of
the Prudhoe Bay oil field. And you'd be getting paid a royalty on
thousands of barrels of crude pulled from this reserve.
As you would expect, that's been pretty profitable. In the past 10
years, BPT has earned a total return of 2,248%. A $5,000 investment
just 10 years ago would be worth $117,400 right now.
To give you an idea of how strong a return that is, integrated oil
returned 231% over the same period. That would have turned $5,000
into $16,550. Not bad, but nowhere near what BP Prudhoe Bay Royalty
Chevron digs up about 2.8 million barrels of black gold every day
and is one of the industry's biggest producers. But Chevron also
has to shoulder the enormous expenses and risks that come with
being a big oil company.
In a recent quarter, it generated $64 billion in revenue... BUT $52
billion of that went toward employee salaries, marketing campaigns,
. And then Uncle Sam took $5.5 billion in corporate taxes.
That still left a respectable $7.7 billion in pure
. But the vast majority of that was pumped right back into the
business to find and develop new sources of oil.
In the end, only $0.78 per share was set aside for stockholder
dividends. Today the
has risen slightly to $0.81 per share. That's a yield of 3.0% at
Compare that to the $9.40 per unit BPT paid out in 2011, giving a
yield of 8.1%. No wonder it's been so much What's the secret behind
more lucrative to invest in BPT instead of Chevron.
BPT's success? Well, like clockwork, the trust pays royalties every
Since January of 2004 the royalty checks have averaged $2.03 per
unit each quarter. That's an average of $8.12 per unit each year --
turning every 1,000 units you own into an extra $8,000 in your
These royalty trusts can yield up to 17.1%
And those royalties are on top of capital gains. BPT's share price
gained 667% during the past 10 years thanks to rising oil prices,
while Chevron's stock price went up only 137%.
The thing is, BPT not only beat Chevron... it beat out just about
every major oil company over the same period.
And that's only part of the equation. Go back a few more years, and
the major oil and gas companies aren't even in BPT's league.
BPT has generated total returns of 5,089% since 1990 -- beating the
"big" names in the oil and gas industry. Chevron... Exxon...
Shell... you name it.
So am I saying you need to
up on BPT? No. In fact, I'd steer clear of the investment.
Royalty trusts are born with a fixed amount of land that can be
milked for hydrocarbons. And since there's a finite amount of oil
and gas that can be economically extracted from any given acre, all
trusts will eventually deplete their resources and run dry. When
that happens, the trust is essentially closed down.
Generally speaking, I tend to favor newer trusts over those that
were created decades ago. BPT went public back in 1989. It's been
paying royalties for more than 20 years. Newer trusts allow us to
get in earlier to the production life.
Action to Take -->
That's not to say investors can't or won't make money in BPT. But
I'd much prefer to put my money to work in trusts formed more
recently, like Chesapeake Granite
Trust, which I shared last week.
The field of royalty trusts is small -- only about two dozen trade
on the market. But
we've found one trust yielding up to 17.1%
... and several more that have seen returns in the same ballpark as
BPT. For more information -- including names and ticker symbols --
visit this link
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CHKR in one or more if its "real money" portfolios.
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