Canadian Royalty Trusts Pay High Cash Distributions

If you are looking for high income, consider a Canadian 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 monthly distributions (dividends). Typically the yield is in excess of ten 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 monthly distribution 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 you buy an energy trust, check with your tax advisor to understand the tax implications of owning the trust.


Updated Janaury 12, 2008.

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