Royalty Trusts: Maintaining Income in a Volatile Market

Includes: CRT, DOM, HGT, PBT, SBR, SDS
by: Fritz Hottinger

With all due respect to those optimistic market prognosticators who still see the glass as half-full, we offer you some continuing words of caution:

There is more pain to come. The fat lady has not yet sung. In fact, she has more lives than a cat. And, the ping-pong ball has not yet reached the bottom of the stairwell - it occasionally gets carried up a few flights by well-meaning passers-by - but gravity will prevail.

We wish there were something on the horizon to erase our pessimism, but from our viewpoint economic storm clouds continue to gather like hurricanes off the Atlantic Coast: as soon as one blows itself out, another appears. Just when the market thought the real estate crunch had been factored into reality, more studious gurus decided it was only the residential segment of the market that had been revalued - now we must watch commercial real estate plunge as strip malls go empty, trend and big box stores close, and factories disappear.

Add more bad news: miserable unemployment numbers and its negative effect on gross disposable income; growing doubts about the financial strength of Fannie (FNM) and Freddie (FRE) and their now not so inevitable Federal rescue; continuing turmoil in the automotive, airline, and financial sectors. It all adds up to more volatility and a continuing loss of confidence in the market.

We do not expect things to settle down until after the November election, when the economic direction of the country will be more clearly defined. Meanwhile, our crystal ball still shows the Dow dropping down to the 10,000 level.

For those investors watching their principal shrink with these 3-digit Index plunges like the one on Sept 4, (Dow down over 300 points), there is still time to put out an anchor to windward with some contra funds. We like SDS, which moves up twice the percentage of a drop in the S&P 500. (A cautionary note: it also drops twice as fast when the S&P 500 rises.)

For those investors seeking to maintain revenue in the face of dividend reductions and the insidious inflation which erodes purchasing power, we suggest royalty trusts such as Dominion Resources Black Warrior Trust (NYSE:DOM), Permian Basin Royalty Trust (NYSE:PBT), Sabine Royalty Trust (NYSE:SBR), Cross Timbers Royalty Trust (NYSE:CRT) and Hugoton Royalty Trust (NYSE:HGT). (Note: PBT and HGT were recently removed from Dividend Daily's recommended list, but still carry better than 3 stars out of 5).
























These strong, well-managed natural resource trusts should be able to increase dividend flow as inflation raises the value of their underlying assets. However, investors seeking to add such stocks to their portfolios should time their purchasing with a channel, band, or E-Zone System. There is no wisdom in paying too much for any stock, no matter what its dividend might be.

Disclosure: Long SDS, PBT and HGT.