For a small investor, a royalty trust can offer several benefits:
- The best value for individuals are their size. Royalty trusts tend to be small caps stocks. Large institutions tend to ignore royalty trusts because they’re too small to affect their overall rate of return, regardless of how profitable they are. But you must buy them at the right time! (more on that below)
2. High Yield: Royalty trusts often distribute a significant portion of their income to investors. This can be attractive for income-seeking investors.
3. Tax Benefits: In some jurisdictions, the distributions from royalty trusts might be treated favorably for tax purposes, although this varies widely by location and specific trust structure. Investors might benefit from deductions or lower tax rates on income from natural resources.
For the savvy buyer: – Volatility: The payouts can be highly dependent on commodity prices, leading to income variability. – But this is also their main advantage if you’re smart!
Commodity markets are far more volatile than they once were. For years, markets were kept stable, first by OPEC for oil, but also in the US by things like the strategi grain reserve. This stability does not exist to the extent that it once did.
Since these trusts simply pay out royalties, once the commodity stabilizes, the asset price will come back.
Depletion: Since trusts generally do not reinvest in new assets, the underlying resource base depletes over time, which might affect long-term income and the trust’s value. –
Lack of Growth: Unlike companies, royalty trusts don’t typically reinvest in growth opportunities, so the potential for capital appreciation might be limited. For small investors, royalty trusts can be a niche part of a broader investment strategy, offering both potential income benefits and risks that should be weighed against other investment options.
For the savvy investor, these are shares you put on a list and wait. When the shit hits the fan and people are selling, back up the truck.
We will list trusts we follow on this page, so link it.