Collect a 24.5% Yield Starting February 8
This Royalty Trust Yields 24.5%
Today’s post highlights one of the last places left to find double-digit yields: oil well royalties.
You may have noticed prices starting to pick up at the pump. While that might be bad news for drivers, it creates a lucrative income opportunity for investors.
Case in point: SandRidge Mississippian Trust I (NYSE:SDT). This firm owns interests in dozens of oil wells across the Midwest. And while you couldn’t call the trust a safe bet by any means, this cash cow sports one of the highest yields around.
The business is pretty easy to wrap your head around. Unlike regular oil companies, SandRidge doesn’t prospect for new reserves. Instead, the business just bought up some stakes in a number of producing wells and milks these gushers for easy profits.
In other words, investors don’t have to worry about hitting a dry hole. Workers completed the wells years ago, and the previous owners have built all of the needed infrastructures nearby. Now, unitholders can sit back and profit from years of hard work done by previous investors. For investors, this model has created a tidy income stream.
Ongoing expenses represent only a small piece of revenues. The trust only pays a small amount of overhead, in addition to government royalty payments.
And with oil prices nearing $60.00 per barrel, SandRidge has started to really gush profits. The trust paid out a distribution of 0.049 per unit last quarter, which comes out to an annual yield of 24.5%. Upcoming payments could be even larger, given the recent rally in the energy markets.
Source: Google Finance
To be absolutely clear, SandRidge is a speculative investment. Oil well production declines over time. That means SandRidge’s distribution will run dry at some point.
A drop in oil prices could also clip payments. SandRidge’s profits depend almost entirely on the energy market. So if the economy slows and the crude market gets hit by a supply glut, these distributions will get creamed.
To say it another way, SandRidge is the cherry on a well-diversified dividend portfolio. With a yielding nearing 25%, it provides a nice bonus for income investors. That certainly makes it easier, at least for me anyway, to stomach higher prices at the pump.