Updated on November 13th, 2023 by Bob Ciura
Oil and gas trusts are now offering exceptionally high distributions to their investors, resulting in much higher yields than the ~1.6% average dividend yield of the S&P 500.
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In this article, we will discuss the prospects of the 7 highest-yielding royalty trusts.
Table of Contents
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High-Yield Royalty Trust No. 7: Permian Basin Royalty Trust (PBT)
High-Yield Royalty Trust No. 6: PermRock Royalty Trust (PRT)
High-Yield Royalty Trust No. 5: Sabine Royalty Trust (SBR)
High-Yield Royalty Trust No. 4: Cross Timbers Royalty Trust (CRT)
High-Yield Royalty Trust No. 3: MV Oil Trust (MVO)
High-Yield Royalty Trust No. 2: Permianville Royalty Trust (PVL)
High-Yield Royalty Trust No. 1: San Juan Basin Royalty Trust (SJT)
High-Yield Royalty Trust No. 7: Permian Basin Royalty Trust (PBT)
Dividend Yield: 2.3%
Founded in 1980, Permian Basin Royalty Trust is based in Dallas, Texas, and is an oil and gas trust (about 70% oil and 30% gas). Its unitholders have a 75% net overriding royalty interest in Waddell Ranch Properties in Texas, which includes 332 net productive oil wells, 106 net productive gas wells and 120 net injection wells; and a 95% net overriding royalty interest in the Texas Royalty Properties, which includes various oil wells.
The trust is severely hurt by the natural decline of its production. Over the last six years, the production of oil and gas of the trust has declined at an average annual rate of -6% and -2%, respectively.
Click here to download our most recent Sure Analysis report on Permian Basin Royalty Trust (PBT) (preview of page 1 of 3 shown below):
High-Yield Royalty Trust No. 6: PermRock Royalty Trust (PRT)
Dividend Yield: 9.8%
PermRock Royalty Trust is a trust formed in late 2017 by Boaz Energy, a company that is focused on the acquisition, development and operation of oil and natural gas properties in the Permian Basin. The Trust benefits from the unique characteristics of the Permian Basin, which is the most prolific oil producing area in the U.S. The properties of PermRock consist of long-life reserves in mature, conventional oil fields, with shallow, predictable decline rates.
PermRock expects to drill new producing wells in the Permian Shelf area. It will also try to grow its production at existing wells and reactivate wells which were inactivated due to the slump of commodity prices during the pandemic. Nevertheless, it is important to note that the production of PermRock has declined in each of the last three years.
Click here to download our most recent Sure Analysis report on PermRock Royalty Trust (PRT) (preview of page 1 of 3 shown below):
High-Yield Royalty Trust No. 5: Sabine Royalty Trust (SBR)
Dividend Yield: 9.8%
Sabine Royalty Trust is an oil and gas trust that was formed in 1983 by Sabine Corporation. It consists of royalty and mineral interests in producing properties and proved oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. It generates approximately two-thirds of its revenues from oil and one-third of its revenues from gas. The trust has static assets, i.e., it cannot add new properties to its asset portfolio. Sabine Royalty Trust has no operations but is merely a pass-through vehicle for royalties.
All the oil and gas trusts face a strong secular headwind, namely the natural decline of their producing wells. Due to this decline, their production is expected to decrease in the long run. Sabine Royalty Trust has proved superior in this aspect. When it was set up, 40 years ago, it was expected to have a life of 8-10 years. However, it is still producing meaningful volumes and is expected to remain in life for more than a decade.
Click here to download our most recent Sure Analysis report on Sabine Royalty Trust (SBR) (preview of page 1 of 3 shown below):
High-Yield Royalty Trust No. 4: Cross Timbers Royalty Trust (CRT)
Dividend Yield: 11.2%
Cross Timbers Royalty Trust is an oil and gas trust (about 50/50), set up in 1991 by XTO Energy. Its unitholders have a 90% net profit interest in producing properties in Texas, Oklahoma, and New Mexico; and a 75% net profit interest in working interest properties in Texas and Oklahoma. A working interest property is one where the unitholder shares in production expense and development cost. This means that the trust does not offer any distributions to its unitholders when its development costs exceed its revenues.
Cross Timbers Royalty Trust estimates that the rate of natural production decline of its oil and gas properties is 6%-8% per year. This is a significant headwind for future returns.
Click here to download our most recent Sure Analysis report on Cross Timbers Royalty Trust (CRT) (preview of page 1 of 3 shown below):
High-Yield Royalty Trust No. 3: MV Oil Trust (MVO)
Dividend Yield: 12.2%
MV Oil Trust acquires and holds net profits interests in the oil and natural gas properties of MV Partners, LLC. Its properties include about 860 producing oil and gas wells located in the Mid-Continent region in the states of Kansas and Colorado. The trust was formed in 2006 and is based in Houston, Texas.
MV Oil Trust has similar characteristics to BP Prudhoe Bay Royalty Trust. In contrast to the other trusts, MV Oil Trust pays its distributions every quarter, not every month.
Overall, MV Oil Trust has exhibited decent business performance over the last decade but it is undoubtedly vulnerable to the major headwinds facing the oil and gas trusts, namely the downturns in oil and gas prices and the natural decline of production.
High-Yield Royalty Trust No. 2: Permianville Royalty Trust (PVL)
Dividend Yield: 14.6%
Permianville Royalty Trust was incorporated in 2011 and is based in Houston, Texas. It operates as a statutory trust and owns a net profits interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from properties located in the states of Texas, Louisiana and New Mexico.
Permianville Royalty Trust has proved more vulnerable than most royalty trusts to the downturns of the energy market. Over the last eight years, the total production of Permianville Royalty Trust has declined at an average annual rate of 6%. Such a decline rate weighs heavily on future growth prospects. Overall, Permianville Royalty Trust is highly risky and hence investors should consider purchasing it only during severe downturns.
Click here to download our most recent Sure Analysis report on Permianville Royalty Trust (PVL) (preview of page 1 of 3 shown below):
High-Yield Royalty Trust No. 1: San Juan Basin Royalty Trust (SJT)
Dividend Yield: 20.5%
San Juan Basin Royalty Trust is a medium sized gas trust, which was set up 40 years ago by Southland Royalty Company. The producing properties are all in northern New Mexico, in the San Juan Basin.
San Juan Basin Royalty Trust has a key difference from the other royalty trusts. It produces a negligible amount of oil and thus its results are affected only by the cycles of the price of natural gas. Thanks to favorable gas prices, San Juan Basin Royalty Trust more than doubled its annual distribution, from $0.77 in 2021 to a 10-year high of $1.71 in 2022.
Click here to download our most recent Sure Analysis report on San Juan Basin Royalty Trust (SJT) (preview of page 1 of 3 shown below):
Final Thoughts
On the surface, oil and gas royalty trusts are attractive as they widely offer higher yields than the S&P 500 average.
All the oil and gas trusts thrived in 2022 thanks to the exceptionally high prices of oil and gas, which resulted from the sanctions of western countries on Russia. However, oil and gas prices are infamous for their dramatic swings.
Therefore, investors should be prepared for much lower distributions from royalty trusts going forward. They should also be aware of the excessive risk of all these trusts near the peak of their cycle. The ideal time to buy these trusts is during a severe downturn of the energy sector, when these stocks plunge and thus become deeply undervalued from a long-term perspective.
As mentioned above, all the oil and gas trusts are highly risky due to the natural decline of their production and their sensitivity to the prices of oil and gas.
If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:
High-Yield Individual Security Research
Other Sure Dividend Resources
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