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We would like to start off by warning investors that Torch Energy Royalty Trust (NYSE:TRU) is a purely speculative play, and only investors willing to take on extra risk should even consider it. Our favourite play on the list is Mesabi Trust (NYSE:MSB). It has an enterprise value of $359 million, a quarterly revenue growth rate of 20.4%, a quarterly earnings growth rate of 20.4%, a sizzling ROE of 690%, a very strong three-year dividend growth rate of 55.6%, a total three-year return of 235%, and has been paying dividends since 1990. It has levered free cash flow rate of $6.96 million. MSB also has a short interest ratio in excess of 10% and this makes it a potential candidate for a short squeeze. As MSB has a high beta, individuals with lower risk thresholds might be more attracted to NuStar Energy L.P (NYSE:NS) which sports a lower beta of 0.41.

Investors should pay attention to the following risks associated with trusts:

  • Cash flow is dependent on the price of the underlying commodity and production levels, and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  • While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone; the trust is also gone. Investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening a position in the trusts that are discussed in this article.

Payout ratios are not that important when it comes to MLPs, for the following reason:

  • MLPs are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on as far as MLPS are concerned is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

Novice investors should pay attention to the following metrics, as they could prove to be useful in your selection process.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. Individuals searching for stocks that offer high yields might find the following article to be of interest;7 Stocks With Grand Yields As High As 49.2%

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime.

Two other notable plays are NuStar Energy L.P (NS) and Atlas Pipeline Partners LP (NYSE:APL), with yields of 7.6% and 5.6% respectively.

NS has an enterprise value of $6.21 billion, a quarterly revenue growth rate of 60%, a quarterly earnings growth rate of 2.7%, a ROE of 9.32%, a five-year distribution growth rate of 4.19%, a five-year dividend average of 7.4%, a total three-year return of 53%, and has been paying dividends/distributions since 2001. It has an operating cash flow of $283 million and a levered free cash flow rate of- $49.9 million. It has consecutively increased dividends for 10 years in a row.

Net income for the past three years is as follows: In 2008, net income stood at $254 million; in 2009, it dropped to $224 million; in 2010, it moved up to $238 million. Net income for 2011 is roughly $191 million. Out of a possible 5 stars, we would assign NS 4 stars.

APL has an enterprise value of $2.36 billion, a quarterly revenue growth rate of 53%, a quarterly earnings growth rate of -83%, a ROE of 24.75%, a strong five-year distribution growth rate of 60.15%; a strong 5 year dividend/ distributions average of 12.8%, a total three-year return of roughly 400% and has been paying dividend/distributions since 200. It has an operating cash flow of $85.8 million and a levered free cash flow rate of- $60.55.

Net income for the past three years is as follows: in 2008, it was -$581 million; in 2009, it turned positive and surged to $62 million; in 2010, it more than quadrupled to $280 million. Net income for 2011 is roughly $300 million. The distribution was increased by 7 cents from 47 cents to 54 cents.

Stock

Div.

Yield

Market Cap

Fwd PE

EBITDA

Quarterly Revenue

Growth

Beta

Revenue

Operating

Cash flow

EXLP

8.8%

822.3M

32.94

96.90M

34.60%

0.68

293.42M

60.31M

MSB

16.00%

394M

9.7

32.4M

20.70%

1.82

33.12M

16.73M

VALE

7.00 %

115.6B

5.72

32.04B

9.10%

1.31

55.37B

22.61B

TRU

6.10 %

25.28M

11

2.2M

28.70%

1.31

3.69M

-----

MVO

8.40 %

478.52M

11.33

36M

7.80%

0.44

37.09M

-----

Exterran Partners, L.P. (NASDAQ:EXLP)

Net income for the past three years is as follows: In 2008, it was $29.8 Million, in 2009 it dropped to $14. 7million and in 2010, it dropped even more to -$23 million. For 2011, net income has increased and stands at $1.5 million; as long as it does not lose money in the final quarter total net income could remain positive and come in the $4.8 million-plus ranges. EXLP has a levered free cash flow rate of $19.55 million.

It has consecutively increased its dividend payment for four years in a row. The dividend was raised from $0.4825 to $0.4875 and EXLP has been paying dividends since 2007.

Potential warning signs

In 2008 and in 2009 total cash flow from operating activities was more than enough to cover dividend payments of $32 and $37 million respectively. In 2010 there was a short fall of $7 million dollars; total cash flow from operating activities came in at $43 million and dividend payments amounted to $50 million. For 2011, the situation seemed to improve; cash flow from operating activities was enough to cover dividend payments for the second and third quarter but not for the 1st quarter.

Key ratios

  1. Price to sale 2.67
  2. Price to tangible book 2.73
  3. Price to cash flow 15.50
  4. Price to free cash flow -7.20
  5. 5 year sales growth 55.71
  6. Inventory turnover N/A
  7. Asset turnover 0.30
  8. ROE -5.42%

  1. Return on assets 2.25%
  2. 200 day moving average 22.79
  3. Total debt 552.33M
  4. Book value 11.31
  5. Dividend yield 5 year Average 8.40%
  6. Dividend rate $1.92
  7. Payout ratio 1,865.00 %
  8. Dividend growth rate 5 year average 0%
  9. Consecutive dividend increases 4 years
  10. Paying dividends since 2007
  11. Total return last 3 years 125.45 %
  12. Total return last 5 years 16.87 %

Mesabi Trust (MSB)

Net income the past three year is as follows: In 2008, it reported a net income of $3.6 million, it 2009 it dropped to $12.4 million and in 2010, it rose to $34.2 million. For 2011, net income so far is roughly $26.8 million; if it maintains this pace, then net income for 2011 could top the $39 million mark.

It has a short interest ratio of 10.3%, which makes it a potential candidate for a short squeeze.

Key ratios

  1. Price to sales 10.86
  2. Price to tangible book 76.26
  3. Price to cash flow 11.20
  4. Price to free cash flow -29.30
  5. 5 year sales growth 9.45%
  6. Inventory turnover N/A
  7. Asset turnover 1.80

  1. ROE 719%
  2. Return on assets 111%
  3. 200 day moving average $ 26.49
  4. Total debt $ 0.00
  5. Book value $0.36
  6. Dividend yield 5 year Average 11.00%
  7. Dividend rate $ 2.42
  8. Payout ratio 89%
  9. Dividend growth rate 3 year average 55.6%
  10. Consecutive dividend increases 2 years
  11. Paying dividends since 1990
  12. Total return last 3 years 235%
  13. Total return last 5 years 36%

Vale S. A. (NYSE:VALE)

Net income for the past three years is as follows: In 2008, it was $ 13.2 billion, in 2009 it dropped to $ 5.3 billion and in 2010, it surged upwards to $17.3 billion. It has a very strong healthy levered free cash flow rate of $7.98 billion.

EXLP has a levered free cash flow rate of $19.55 million. Total cash flow from operating activities more than easily covered dividend payments for the past three years.

Key ratios

  1. Price to sale 2.07
  2. Price to tangible book 2.41
  3. Price to cash flow 4.50
  4. Price to free cash flow 58.10
  5. 5 year sales growth 58.10
  6. Inventory turnover 4.00
  7. Asset turnover 0.50

  1. ROE 29.63%
  2. Return on assets 14.55%
  3. 200 day moving average 26.23
  4. Total debt 26.62B
  5. Book value 14.82
  6. Dividend yield 5 year Average 2.30 %
  7. Dividend rate $ 0.03
  8. Payout ratio 34.00 %
  9. Dividend growth rate 5 year average 0.00 %
  10. Consecutive dividend increases 2 years
  11. Paying dividends since 2002
  12. Total return last 3 years 79.92 %
  13. Total return last 5 years 86.70 %

Torch Energy Royalty Trust

Net income for the past three years is as follows: In 2008, it was $3.1 Million, in 2009 it dropped to $1. 23million and in 2010, it increased to $2.03 million. For 2011, net income so far is only $549, 000.

Warning signs

Net income for the past three years has been erratic; net income for 2011 so far is about a quarter of what TRU earned back in 2010.

On January 29, 2008, holders of more than 66 2/3% of the outstanding units of beneficial interest in the Trust affirmatively voted for a proposal to terminate the Trust in accordance with the terms and provisions of the Trust Agreement. Accordingly, the Trust is currently in the wind up and liquidation process.

Torch Energy Royalty Trust ("Trust") (torchroyalty.com) announced today that the Torch Energy Royalty Trust (the "Trust") issued a press release announcing that the Trust had entered into a non-binding letter of interest on November 2, 2011 with respect to the sale of the Trust's net profits interests attributable to underlying working interests in certain fields that produce from the Cotton Valley and Austin Chalk formations in Texas and the Chalkley field in Louisiana. The closing of any transaction is subject to due diligence, the negotiation and execution of mutually acceptable definitive agreements and the satisfaction of any conditions to closing set forth in those agreements. There can be no assurance that these discussions will lead to a transaction, or that the terms set forth in any definitive agreements will be consistent with the current expectations of the parties.

Only speculators should entertain the idea of getting into this play. Only Las Vegas money should be used.

Key Ratios

  1. Price to sale 6.85
  2. Price to tangible book 2.13
  3. Price to cash flow 11.10
  4. Price to free cash flow N/A
  5. 5 year sales growth -16.20
  6. Inventory turnover N/A
  7. Asset turnover 0.30

  1. ROE 18.78%
  2. Return on assets 10.76%
  3. 200 day moving average 2.67
  4. Total debt 0.00
  5. Book value 1.38
  6. Dividend yield 5 year Average 10.10 %
  7. Dividend rate $ 0.17
  8. Payout ratio 62.00 %
  9. Dividend growth rate 5 year average 0.00 %
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 1994
  12. Total return last 3 years 48.44 %
  13. Total return last 5 years -38.43 %

MV Oil Trust (NYSE:MVO)

Net income for the past three years is as follows: In 2008, it was $32.8 Million, in 2009 it dropped to $20.7 million and in 2010, it dropped even more to $17.9 million.

For 2011, net income has surged upward, and so far it stands at $26.4 million; if MVO can maintain this pace, then total net income for 2011 could top $37 million.

Key Ratios

  1. Price to sale 12.72
  2. Price to tangible book 13.91
  3. Price to cash flow 13.10
  4. Price to free cash flow N/A
  5. 5 year sales growth N/A
  6. Inventory turnover N/A
  7. Asset turnover 1.00

  1. ROE 101.84%
  2. Return on assets 64.02%
  3. 200 day moving average 39.84
  4. Total debt 0.00
  5. Book value 2.95
  6. Dividend investor
  7. Dividend yield 5 year Average 10.10 %
  8. Dividend rate $ 3.61
  9. Payout ratio 110.00 %
  10. Dividend growth rate 5 year average 0.00 %
  11. Consecutive dividend increases 0 years
  12. Paying dividends since 2007
  13. Total return last 3 years 355.91 %
  14. Total return last 5 years N/A

Conclusion

TRU is a pure speculative play, and investors with low to normal risk tolerance levels should avoid it. Having said that it has surged over 50% in just seven days.

We have continued to stress that the markets are overbought, and are giving signs that a top could be around the 18th-21st of this month. Long-term investors would be best served by waiting for the markets to pull back strongly before deploying large sums of money. VALE and MSB sport fairly high betas which make them good candidates for covered writes; stocks with high betas usually command higher premiums.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before investing any capital in them. Some investors are happy with taking enormous amounts of risks, while others are bothered by the slightest degree risk; it is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.All dividend history graphs were sourced from dividata.com

Source: 7 Dividend Plays With Yields Up To 16%