In case you didn't already know... it's a tough time to be an
2%, the average
stock in the S&P pays slightly more at 2.1%, and a
earns next to nothing.
But if you think that means that high-yield opportunities are in
short supply, think again.
There are dozens, if not hundreds, of high-yield plays hiding in
that most investors simply don't know about. You just have to know
where to look.
Take the energy sector for example.
When most people think of energy stocks, integrated oil and gas
usually come to mind.
But while Chevron's 3% yield is nothing to laugh at, don't think
for a second that's the best you can do. In some industries, 3%
might be the ceiling, but it's often just the floor in certain
subsectors of the energy space.
The recent shale boom in the U.S., expanding economic output in the
, and fears over oil security in the Middle East have all stoked
demand for everything from fracking fluids to LNG tankers.
Consequently, energy companies across the board are raking in
record amounts of cash... and paying it back to investors in the
form of dividends.
But look closely, and you'll notice its not major players like
investors these healthy distributions. Rather, these robust yields
are coming from non-traditional energy investments like MLPs and
I won't talk much about MLPs. I've already covered them extensively
here. Instead, I'd like to introduce you to another class of
high-yielding securities the energy sector has to
-- royalty trusts.
Royalty trusts boast some of the highest yields on the market --
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
. I've found several with returns in excess of 300% over the past
Yet despite their double-digit yields, and solid industry
fundamentals to boot, many retail investors are generally unaware
these securities even exist. Most can't name even two royalty
trusts -- let alone know enough about them to consider buying into
In the simplest of explanations, they work like this. When an
energy company wants to raise money, it can sell a "stake" or
interest in certain properties in the form of a trust. Most
commonly, these properties are oil and gas wells, but sometimes
they're built around other resources like coal or iron ore.
takes care of the drilling, production, marketing, and selling of
the oil and gas produced from those wells.
is passive in the relationship. It doesn't have to do a thing. In
return for the initial investment when it went public, its
investors get a cut of all the oil and natural gas sold from the
Now, you might be wondering why any energy company would
voluntarily give up a percentage of the income from its wells. The
answer here is simple.
Developing wells requires a lot of capital. Increasingly, the
financial whizzes at these firms are finding that selling royalty
interests is a much better way to raise cash than borrowing from a
or printing new
This financing arrangement is a win-win. From an investor's
perspective, these trusts exist for just one purpose: to collect
ongoing royalty payments and distribute them to unitholders.
(Shares of trusts are called "units" instead of shares.)
One such trust is
, an offspring of energy giant
Chesapeake Energy (
CHKR is a brand new trust with royalty rights to 69 of Chesapeake's
existing wells in the Granite Wash, an oil producing region that
spreads from the Texas panhandle all the way to western Oklahoma.
According to the geologists, these wells will be drawing from a
reserve base of 18.6 million barrels of oil equivalent
(approximately half gas, the rest crude and natural-gas liquids
But it doesn't stop there. Unitholders will also be entitled to 50%
of the proceeds from another 118 development wells that will be
drilled over the next few years.
The development wells, which will be located on 45,000 acres in the
Anadarko Basin of western Oklahoma, will more than double today's
production as they come online. There are another 25.7 million
barrels of oil below the development wells, for a grand total of
44.3 million barrels attributable to the trust.
I think the added output makes CHKR an attractive investment.
Though it's a new trust, it's backed by Chesapeake, a veteran oil
and gas producer. And the initial distribution bodes well. Thanks
to higher-than-expected sales
, CHKR was able to pay investors $0.58 a unit, versus a target of
As production increases, those distributions should only grow
larger. Right now, CHKR is targeting a $3.13 dividend for all of
2012. But it expects that number to grow to $3.48 by 2013 as more
wells come on-line.
If you're an income investor starved for higher yields, I think
CHKR could be a good buy. Its 10% yield is one of the highest
you'll see in this low interest rate environment.
Let me warn you though. Like any natural resource investment,
royalty trusts carry
risk. Energy prices could remain volatile as signs of economic
deceleration in developed economies continue to hang over financial
Action to Take -->
But, that said, the long term fundamentals look
for energy investments. Dwindling reserves and rising global demand
will inexorably lead to higher oil prices. And judging by the last
ten years of stock market data, one thing seems certain -- the
energy space looks like one of the best hunting grounds for income
investors looking for higher returns.
I've barely scratched the surface on the unique benefits royalty
trusts have to offer. If you want to learn more about how you can
earn double-digit yields in this lucrative sector, I invite you to
. In it, I'll highlight everything you need to know about royalty
trusts, and give you the ticker symbol for one of my favorite
trusts yielding 17.1% right now.
For more information, click here
-- Nathan Slaughter
Nathan Slaughter owns shares of CHK.StreetAuthority LLC owns
shares of CHK, in one or more if its "real money" portfolios.