Portfolio of American Oil and Gas Royalty Trusts

If you are looking for high income, consider an American royalty trust that sells oil and gas from its proven and probable reserves. The trust pays shareholders a large percentage of its free cash in the form of cash distributions (dividends). Typically, the yield is in excess of five percent.

One downside of a royalty trust is that eventually it will run out of oil and gas so before you buy one, check the reserve life of the trust's holdings. Look for a reserve life of at least ten years and the longer the better. Of course a trust can purchase new reserves but there is no guarantee of their life span.

A trust pays its distributions from free cash flow (net income plus depreciation minus capital spending). Compute the ratio of the distribution with the cash flow. A small percentage means the distribution can be maintained or increased. Beware of a large percentage of 90 percent or more.

The day-to-day price of a trust usually tracks the price of oil and natural gas. When oil and gas prices fall, the share prices of most trusts will fall. Unlike a bond that pays you full face value when it matures, the future price of a royalty trust is not guaranteed.

Before investing in these trusts, check with your tax advisor about the tax treatment of the cash distributions.

NOTE: buyupside.com does not support royalty trust stock symbols so price and dividend charts are not displayed.