Royalty trusts are arguably the most successful high-yield stocks to ever hit the market. I'd venture more fortunes have been made with these securities than just about any other income investment out there.
I've found some royalty trusts that have returned nearly 3,000% in the past decade on the back of rising oil prices and their high distributions.
Put simply, royalty trusts own a stake in dozens -- if not hundreds -- of oil and natural gas wells. By owning the units (technically, they're not stocks, but trade the exact same), you get the cash from your stake in this production in the form of distributions. It's like owning your own oil derrick, and royalty trusts pay an average yield of 10%, based on current prices.
You'd expect that opportunities to pick up royalty trusts at good prices would be next to impossible. After all, who doesn't want a stake in an oil field... especially when that stake throws off a yield of 10% or more?
But that's not the case right now. And I think investors could make a lot of money.
Since the start of the sell-off, the S&P has shed 5%... while oil has had it even worse, falling over 20% from its recent peak.
Because they are tied to oil and natural gas prices, you'd expect these royalty trusts to fall -- but less than oil prices themselves given the high yields the trusts pay. But consider what's happened with one of my favorite trusts -- SandRidge Mississippian Trust (NYSE: SDT). The shares are down 28% from their highs.
But there's more. In addition to oil, many royalty trusts produce a lot of natural gas -- including SDT, which has roughly 55% of its production in gas. Natural gas prices are up 28% since late April.
Meanwhile, the trust continues to pump out huge dividend payments, the size of which are found in few other places.
An historic opportunity
After the market dropped in the fall of last year, I saw an opportunity and added shares of SandRidge Mississippian Trust to my Top 10 Stocks portfolio after panicked investors dumped the shares. Within months, my subscribers and I were up more than 80%.
As you can see in the chart below, SDT has fallen with the price of crude oil. But rather than look at this as a negative, take it as an opportunity to lock in a 12% yield. Hardly anybody thinks oil is going to stay at these current levels for long, so there's a good chance you'll get some nice share price gains out of this stock, too...
Risks to Consider: Let me be clear. There's no guarantee that you'll make money from buying into the sell-off in SDT. But history is certainly on your side.
And don't get me wrong: Royalty trusts aren't risk-free (nothing short of a savings account is). And as you've seen, they can be volatile when short-sighted investors sell in a panic.
But it's opportunities like this that I believe make you the most money.
Action to Take --> The recent downturn hasn't changed my opinion of SDT. With the shares yielding 12% thanks to the sell-off, I think buying now is much more attractive than just weeks ago. I have a "buy under" price of $33 on the trust.
[Note: SDT reminds me of another stock I wrote about recently. It's my "no-brainer" investment of 2012. This stock has spent $15 billion buying back shares in the past two years, and has $8.5 billion more to go. Maybe that's why Warren Buffett's Berkshire Hathaway owns 7.7 million shares. You can get all the details of this stock, including its name and ticker symbol, in my special presentation, "The 10 Best Stocks to Hold Forever." ]
-- Paul Tracy