With 10 Year Treasury rates trading below 2.7% investors are broadening their horizons as they search for income. We have all
heard horror stories surrounding the inevitable bursting of the "Bond Bubble" and with the stock market near all-time highs
dividend paying equities are increasingly overpriced. In the never ending hunt for yield eventually you come across an
interesting brand of stocks known as royalty trusts.
Royalty Trusts are entities that own the production rights on oil wells, natural gas fields and iron ore mines. Part of their
appeal is that these trusts typically pay out 90% of their earnings on the production to the shareholders as a dividend. As a result these
trusts have incredible yields. You have to be careful when selecting which trust to buy as not all trusts are created
equal. Some own the rights to wells that are decreasing in production year over year and are basically a losing proposition.
Other trusts have termination dates in the near future which mean the trust will cease to exist and become worthless.
Whiting USA Trust II owns interests in oil and natural gas producing properties in the Rocky Mountains, Permian Basin,
Gulf Coast and Mid-Continent regions of the United States. Right now the stock pays a dividend over 26% or $3.55 over the last
year. On paper that sounds great but when you consider the 52 week high of $17.63 the dividend may not compensate for the risk.
Next year's earnings estimates call for the trust to make 24 cents less per share than this year, helping contribute to a
Zacks #5 rank of a strong sell.
SandRidge Mississippi Trust I contains royalty interests in oil and natural gas in northern Oklahoma from the Mississippian
formation. This region has seen production levels fall well below initial estimates. With a Zacks #4 rank, the over 23% dividend
may not be enough to make up for the additional risk. The trust was initially offered to the public over $20 a share in April
2011 but currently trades below $10.
Chesapeake Granite Wash Trust also with a yield over 23% has taken a similar trajectory to SDT since its IPO. In November
2011 CHKR opened for trading at $19 and in the last couple of years has sold off down to the $11 range. The high dividend means
nothing if the stock unwinds more than the dividend pays out. Zacks ranks this stock a #5 or a strong sell due to continued
earnings revisions to the downside. The less these trusts earn in the future the lower the dividend will be for investors.