Royalty and income trusts - Fixed Income Investing

Money Digest, Jan, 2003

Royalty trust units are generally offered by producers of commodities such as oil and gas. When you invest in royalty trust units your money is used to meet the operating expenses of these issuing companies. Once the trusts meet the operating expenses, practically all the remaining cash is passed on to investors, creating an attractive return on investment.

These attractive returns are coupled with some risk factors. Your income will be affected by the current underlying commodity prices. If you hold an oil royalty trust and the price of oil falls, so will the return on your investment. Another risk factor is that you will receive royalties only until the commodity is depleted. The return you get on your investment is not all 'return.' It is also partly a return of your capital.

Despite all these caveats, trusts can be very attractive as income-producing vehicles.

If you would like to invest in royalty and income trusts, we suggest doing your research to make sure that the royalty trust has enough reserves of the underlying commodity to keep paying you royalties for a long time. You can minimize the risk by investing in more than one royalty trust. You may also want to consider buying a mutual fund that invests in royalty trusts.