Canadian Royalty Trusts: Cash in On High Oil Prices

Few people know about a class of Canadian public companies that trade on the stock market called Royalty Trusts. They trade like normal stocks; however, Royalty Trusts is a special business entity in Canada which receives special tax breaks from the Canadian government. In exchange for these tax breaks, they are required by law to pay out at least 90% of all earnings to shareholders.

Canadian Royalty Trusts are created so that the dividends are taxed as personal income and the corporation is not taxed at the corporate level, therefore avoiding double taxation. This is a great income generator for investors as many of the Royalty Trusts are paying double digit dividends annually just by holding these stocks, whether the stock goes up or down.

Most Royalty Trusts are based on a revenue source for a specific asset(s) that the corporation owns. These assets are varied depending on the company and can be in such industries or sectors as mining (gold, uranium etc.), timber, oil and gas or even a patent portfolio.

Today, I will focus on the Canadian Oil Royalty Trusts and give a few examples of some hot ones which have been giving some high returns in the past few years because of the rising oil prices. The double digit dividends are hard to argue with if you are an income investor. An added bonus is the appreciation in stock value as well because of oil prices.

Here is a small list of some oil and gas related Canadian Royalty Trusts traded on the U.S. stock market:

Precision Drill Trust was included as an example of a non oil asset trust, however, it is part of the oil industry that provides contract drilling, service rig, and ancillary services to oil and natural gas exploration and production companies. It is also pays out some handsome dividends as well.

While these are Royalty Trusts that are traded on the U.S. stock exchanges, the majority of them are traded on the Toronto Stock exchange. A good brokerage firm should be able to place the trade on a foreign exchange for a small fee. Some of the stocks traded on the TSE will also trade on the U.S. pinksheets, so you can find them there as well.

One thing to keep in mind, the dividends that these Royalty Trusts pay out can run for years or decades, however, some are limited because of the assets they own is finite. Meaning the assets, like oil or gas is limited to the amount of reserves that are still in the ground.

The best way to invest in the Royalty Trusts is find a company that has large reserves that stretch out for years and continues to add to their reserves through exploration or acquisitions. The dividends will keep on paying as long as the oil and gas supply is being produced by the company. The rising oil prices will also add to the value of the stock that you hold.

Note: There is a proposal by the Canadian government to do away with the tax benefits of the trusts by 2011. It must still be passed by Parliament and signed into law. About 5% of the voters in Canada own income trusts, so it is unpredictable as to what will actually happen. Investors are cautioned to take this into consideration before making an investment.

Disclosure: none

Comments

[seriousinvestor]

What an incredibly misleading article. For one thing BPT is an American not Canadian trust. More importantly, you forgot to mention that in 3 more years the Caanroys all lose their favorable tax treatment and it is very likely that distributions will have to be cut by something like 1/3 to compensate for that lost revenue. Also the RLI's of these trusts vary but are generally less than 12 years so a significant portion of your return is a return of capital not a return on capital. You need to do more research before you post such a misleading article. I hope no one makes any purchases based solely on what you have written.

[Go West]

Retail investors should be cautioned that this analysis is crude (no pun intended). Several Canadian brokerage firms have some very in-depth research coverage on this sector for those interested. The tax holiday ends in 3 years (I believe) and all Canadian trusts have been forced to convert to corporations by then.

[terrythepirate]

What sand pile has your head been hiding in? Most royalty trusts tanked when the Alberta govt. raised taxes last month. HTE has dropped a third of its value. Just goes to show what happens when you trust a farmer that says he won't raise taxes. I guess its like an alcoholic saying he won't drink. The royalty trust investments are a cooked goose. Your article is just socialist spin. When govt. takes the profit whats left is no investment.

[Forex investor]

Yes, it is an error on my part. BPT should not be on this list and thank you for pointing that out. While this is not a definitive list, it is suppose to be an example of Royalty Trusts on the market. It is not a recommendation or offer to buy and sell. Investors are encouraged to do their own due diligence.

It is my understanding that it is still a proposal to do away with the tax benefits of the trusts. It must still be passed by Parliament and signed into law. About 5% of the voters in Canada own income trusts, so it is unpredictable as to what will actually happen.

Different investors will have different styles of investing. Some will see this as an opportunity.

[User 41525]

this is a good article witha major shortcoming. It would ahve been easy and more helpful to include the reserve life for each of the companies, and they are required to disclose it.

[mbc3216]

You did not mention that these trusts have a significant tax change in 2011 which will reduce the dividend

[jerryvanee]

BPT IS NOT A CANADIAN ROYALITY TRUST. IT'S LOCATED IN ALASKA ( PRUDOE BAY ) .

[herb]

Good job on your info,can't beat the price

[herb]

Good job keep up the good work

[User 131523]

If the Canadian oil trusts are "cashing in" on the high price of oil, then why is it they've all done nothing but go down instead of at least showing modest gains which would reflect their worth as an investment, doesn't look like I made a good investment - "Hopefully" PGH will go back above the $18.60 level which is where I got stuck with it.

Why is it, it's doing so poorly"price wise" ? Isn't PGH one of the largest if not the largest oil trusts in Canada, therefore they should be making very modest gains or at least stay steady not showing dissappointing loses ?

Hopefully some hot shot analysts will be able to talk these trusts back up.

[Blasttoisekid]

Even if they become regular corporations in 2011, they have huge resources and they operate in a hot sector. I like'em. I bought them. And I'll get some more.