High-dividend stocks are always popular with investors, but with energy prices taking a sharp dive in recent months, energy bulls with a penchant for income have been flat out of luck.
The price of oil most recently peaked in June at over $100 a barrel. With several strong market forces combining to add pressure to energy prices, oil prices could be primed for $50 a barrel within the next few months.
But don’t expect those prices to last long. At those levels, big producers are more likely to scale back production to drive the price back up. In fact, with U.S. oil supplies slipping unexpectedly last week, that may already be happening.
While there are several types of traditional energy stocks that you can use to play a rebound in oil prices, there’s also a major opportunity in so-called “royalty trusts.”
Royalty trusts are a type of corporation that owns production rights on natural resource properties including oil wells and natural gas fields. They’re not in charge of operations — they just collect royalties on the production, and in exchange for favorable taxation, they pass along those profits to shareholders, usually in the form of cash “distributions,” which are similar to dividends. And many royalty trusts actually have “termination dates,” after which the trust simply stops existing.
Until then, though, these royalty trusts are essentially high-dividend stocks that both appreciate and throw off income as their underlying commodities appreciate. Today, we’re looking at three such trusts — the VOC Energy Trust (VOC), Sabine Royalty Trust (SBR), and BP Prudhoe Bay Royalty Trust (BPT):
High-Dividend Stocks: VOC Energy Trust (VOC)
VOC Distribution Yield: 20.9%
VOC Energy Trust (VOC) is an attractive play for dividend-hungry energy investors because of its enormous payout. Its most recent quarterly distribution at the end of October was 37 cents per share, which is nearly a 21% yield at VOC’s current levels.
But remember: If it sounds too good to be true, it probably is.
The thing to watch out for with royalty trusts boasting absurd dividends is their remaining reserves. VOC pays out 80% of net royalties from its oil and gas reserves directly to investors in the form of a dividend. We know VOC will likely approach zero by the end of 2030, when the royalties are set to expire.
Keep in mind, though, the end of VOC may be even longer than 16 years away, and in the meantime investors will get a healthy income payment every quarter. Net profits will either stop flowing to investors at the end of 2030 or when the trust has produced and sold 10.6 million barrels of oil equivalent, whichever comes later.
In the meantime, VOC is an attractive option for oil bulls who feel a comeback in crude is imminent.
High-Dividend Stocks: Sabine Royalty Trust (SBR)
SBR Dividend Yield: 9.6%
Sabine Royalty Trust (SBR) has an added bonus in that it pays out distributions monthly instead of quarterly, but that hasn’t kept SBR from dropping 25% since late June as investors have anticipated falling cash payouts.
November’s monthly distribution of 35 cents translates to about a 9.6% yield at today’s levels. Unfortunately, the next few monthly distributions likely will continue to fall. The November payout was based on August’s oil production levels and July’s gas production levels — at that point, prices were already dropping, and have continued to decline since then.
Net to trust sales of oil and gas in the most recent month was just over $6 million, a far cry from the $7.5 million the month before. On a per-share basis, November’s 35 cent-per-share dividend was 25% lower than October’s 47-cent payout.
Expect the distribution to keep falling, but remember that both SBR and its payout will rebound should energy prices rise. Also, SBR’s diversification (it derives significant revenues from both oil and natural gas) means upward swings in gas will benefit investors, too.
High-Dividend Stocks: BP Prudhoe Bay Royalty Trust (BPT)
BPT Distribution Yield: 13.7%
With a market cap around $1.7 billion, BP Prudhoe Bay Royalty Trust (BPT) is the largest of its kind in the United States. This exposure to Alaskan oil was initially created by — you guessed it — BP plc (ADR) (BP) 25 years ago. It’s obviously still got plenty of reserves, as its most recent reserve/production ratio indicates that the trust has 14.5 years remaining.
Unlike the diversity you get with both VOC and SBR — both of which produce oil and natural gas — the commodity risk is strong with BPT, which is an oil-only play. Obviously this can be a double-edged sword, since there’s more unmitigated upside in the case of a tremendous rally in the price of oil — but obviously not much to hope for should oil prices stay muted for long.
This quarterly payer dished out $2.03 per share in distributions back in October, which comes out to about a 10.5% annual distribution yield at BPT stock’s current levels.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.