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  • Writer's pictureHigh Dividend Opportunities

Swim In Cash With Energy Royalties


Good Morning Income Investors!

Energy independence is a hot topic and an active pursuit by leading economies. Energy is the lifeblood of a growing economy, and we will need more of it to sustain the ever-increasing world population. Despite the increasing popularity of renewables like wind and solar energy, projections from every credible energy research agency reveal that hydrocarbons will continue to supply the lion's share of the global energy mix for the foreseeable future.

As the world increasingly hunts for energy, more sources are needed to meet the demand. Hence, we will see many new sources introduced, and some may grow fast to acquire a significant share of the energy mix. But that doesn’t mean today’s hydrocarbon sources are going away. In fact, we will be consuming more oil and gas in 2050 than we do today. How can we benefit from this dynamic as income investors? Royalty investments are an excellent way to tap into the stickiness of hydrocarbon demand. They offer substantial benefits for your overall financial well-being in the form of the following:

  1. Passive income - Royalty investments (hydrocarbon or otherwise) are designed to make regular distributions. So every day they are in business, you receive your cut of the profits.

  2. Portfolio diversification - Energy royalties are disconnected from the stock market gyrations because they correlate more strongly with energy prices and the associated supply-demand situation. As such, they provide much-needed diversification for a healthy financial posture.

  3. Tax benefits - Royalty trusts are typically designed to pay pass-through income to investors tax-efficiently. Investors may benefit from tax-advantaged treatment of distributions, which generally are more favorable than traditional dividend income.

  4. Minimal operational risks - Royalty firms typically have a very thin workforce, primarily for administrative tasks. As such, there is no dependency on the labor market or the requirement to retain top talent or incentives to improve workforce productivity. The company’s well-being is generally disconnected from the internal operations and strongly correlated with the leaseholds and customer operations. There is also no capital expense involved in these businesses.

  5. The best inflation hedge - Energy royalties tend to be an effective hedge against inflation because energy prices often rise with inflation. Moreover, royalty interests have zero capital requirements, insulating them from inflationary cost pressures. As the cost of living increases, the royalties paid to investors rise, helping to preserve the real value of income over time.

  6. High Insider Ownership - Generally, firms owning royalty interests are structured as partnerships, and the general partners will have a significant ownership interest in the company to enjoy the passive income from these cash machines. This ensures continued alignment of the business pursuits with our interests and keeps that cash machine running.

The royalty firms in our list have blown the S&P 500 out of the water in the past three years as global economies recovered from the COVID-19 pandemic. Energy royalty companies are not all equal. They have varying proportions of royalty income from Crude Oil, Natural Gas, and NGLs (natural gas liquids). Some have a finite asset durability while others keep making acquisitions to maintain or grow their royalty base. Some pay out most of their royalty income as distributions while others retain a healthy chunk of the profits for corporate activities, acquisitions, and other shareholder enhancement initiatives.


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