by Lawrence Meyers | September 18, 2012 2:05 pm
Bonds, thy name is useless, for the protection you once offered the fixed-income investor is no longer.
Instead, you provide no income, no hedge against inflation, and are tossed about by the Federal Reserve like monopoly money. You are no longer in my portfolio. I banish you, replacing your pointless presence with alternatives that provide what you can no longer.
In this instance, I welcome royalty trusts into my court. These trusts act as the owner of mineral rights to wells, mines and similar properties, and exist only to pass income generated from the sale of the assets to shareholders. Just like a REIT, 90% of net income must pass to shareholders in the form of distributions or dividends. Thus, they make a fine replacement for bond income.
Royalty trusts’ other big advantage is that they’re investments in hard assets. During this period of unprecedented economic uncertainty, holding positions in hard assets are to your advantage. Unlike currency, whose value is subject to the idiocy of the government, hard assets are subject to market forces. The world always will need oil and minerals. Their prices might be volatile, but right now they are in a long-term uptrend.
Here are a few royalty trusts to consider:
BP Prudhoe Bay Royalty Trust (NYSE:BPT) currently pays a 10% dividend. Its distribution is dependent on the price of oil, but the good news is that even a 50% decline in oil prices still would provide investors with a solid dividend. QE3 is expected to keep a floor under commodity prices, which tend to rise amid a sinking dollar, which is what has resulted from previous quantitative easings.
Eastern American Natural Gas Trust (NYSE:NGT) holds net profits created from the working interests owned by Energy Corporation of America in 650 producing gas wells and 65 proved development well locations in the Appalachian Basin in the states of West Virginia and Pennsylvania. Its proven developed reserves are 8,100 million cubic feet of gas. That’s enough gas to generate its 3%-plus yield. That’s not as high as I’d like, but the stock is best used as a hedge against the market because it has a negative beta, meaning it trades at an inverse to the direction of the broader market.
Mesabi Trust (NYSE:MSB) further diversifies the royalty trust selection, as it holds interest in an iron ore pellet mine. The company is almost 100 years old, and its product is used in steel-producing blast furnaces. It produces a steady stream of product, making its generous 9% yield very safe.
North European Oil Royalty Trust (NYSE:NRT) also is more diversified than its name implies, and has enjoyed 37 years of success. It holds overriding royalty rights covering gas and oil production in concessions or leases in Germany. NRT holds these rights under contracts with German exploration and development subsidiaries of Exxon Mobil (NYSE:XOM) and the Royal Dutch Shell (NYSE:RDS.A, RDS.B) group of companies. The company holds royalty rights for the sale of gas-well gas, oil-well gas, crude oil, distillate and sulfur. Given the big names it is involved with, and its long operating history, NRT’s roughly 9% dividend is particularly attractive.
Other royalty trusts exist, too, so if you hunt around, you can build a nice, diversified portfolio of hard assets to substitute for those bond ladders you used to hold.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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