Royalty Trusts: Benefits and Tax Advantages for Investors

Royalty trusts are corporations that specialize in mining or production of oil and natural gas. They can avoid being taxed as corporations if they distribute at least 90 percent of their profits to shareholders as dividends. While giving up such a huge portion of the profit may seem foolhardy, the profits they earn from selling dividends and the money they save by not paying corporate taxes makes up for the loss. Furthermore, this increases their value on the stock market, allowing them to borrow more money than before. To investors, royalty trust dividends offer a number of benefits that make them worthwhile investments.

1. High Dividend Yield

High dividend yield is the profit that investors earn from dividends while they hold on to them. This profit comes from interest payments made to the investors every month. Generally speaking, the value of the yield is inversely proportional to the value of the interest rates. When interest rates are low, the yield tends to be high, but once the interest rates increase, the yield drops.

2. High Dividend Value

Because Royalty Trusts put at least 90 percent of their income into dividends, they can afford to make individual dividends worth more than dividends from other types of corporations. When the investors sell them, they will be able to earn more profits, and if they do suffer losses, they will be smaller than losses from other dividends.

3. Tax Status Advantages

Unlike many other investment vehicles. distributions from royalty trusts are not taxed as income. Rather, they are taxed as capital gains. Capital gains taxes tend to be lower then income taxes. Furthermore, the investors are not taxed until they sell the dividends, which gives investor more time to save enough money to pay the tax. Furthermore, this gives the investor an opportunity to offset those capital gains with capital losses, from either royalty trusts dividends or other investments.

Another advantage of the tax status of royalty trust dividends is that it avoids double taxation. Double taxation occurs when dividend income is taxed as both personal and corporate income. Because dividends from royalty trusts are taxes as capital gains, this extra tax burden is avoided altogether.

4. Long-Term High Demand

As the population grows, the demand for oil and natural gas continues to increase. Contrary to popular assumption, the increase in hybrid and otherwise non-gasoline-powered cars will not dramatically affect demand. Oil would still be used to make various plastics, synthetic fibers, hair products, lubricants, etc. The fact that fossil fuels are innately finite increases the demand even further. Together, those factors ensure that no matter what shape the economy is in, the values of royalty trusts will keep rising.

5. Safer Alternative to Futures Market

Futures market involves investors making profits by betting on how the prices on certain services or commodities will behave in the future. This includes speculation involving the prices of fossil fuels. While futures market can generate large profits, it can backfire just as badly. While investors have some ways of predicting market trends, they can't truly be sure which way it will turn out. Royalty trusts take some of the speculation out of the equation to the prices of the fossil fuels.