Revealed: Royalty Income Streams Paying Up to 23%
These Income Investments Deliver Ongoing Royalties
Charlie Clark used to scrimp and save just to keep his rural Pennsylvania farm afloat. But when the drilling rigs started rolling into town, everything changed.
It all started when an oil company representative knocked on the door. In exchange for permission to drill on Clark’s land, the rep offered to pay a royalty on each cubic foot of gas pulled out of the ground.
These royalties, which amount to about $10,000 a month, have arrived in Clark’s mailbox like clockwork for years now. (Source: “Millions Own Gas And Oil Under Their Land. Here’s Why Only Some Strike It Rich,” NPR, March 15, 2018.)
Clark described it as being like he had won the lottery.”We’re living like we used to, but without the stress,” he said in 2018. “The bills are all paid. Your kid’s gotta go to college? No problem.”
Clark’s story reveals one of the greatest types of income investments ever invented: royalties.
For those not familiar with the term, royalties are cash payments received on an ongoing basis for an asset you own, created, or developed. Royalties allow you to buy or create something once and then receive a steady income for the rest of your life.
For example, landowners often own the rights to all of the natural resources underneath their properties. For this reason, drillers have to negotiate a royalty on each barrel of oil or cubic foot of natural gas produced.
Royalties are also common in the music business. Radio stations write songwriters a check each time they play one of their tracks on the air. That’s why Don McLean still makes an estimated $322,000 a year from his folk-classic “American Pie.” (Source: “Here’s How Much You Can Earn from a Mega-Hit Song,” A Journal of Musical Things, January 14, 2014.)
The list goes on. Authors receive a royalty on the sale of each book. Inventors collect royalties on their patents.
And you don’t need to be the creative-type or a landowner to begin cashing in. Like with any other asset, traders buy and sell royalty streams on public exchanges. Many businesses, which trade like ordinary stocks, have earned lucrative returns by simply buying up royalties and paying out the income generated.
The power of this business model can make these income investments incredibly appealing. Royalties represent real assets, like farmland or private businesses. Payments also rise during times of inflation, thus protecting the value of royalty owners’ savings.
More importantly, these income investments pay out some of the highest yields around.
That’s because ongoing costs range from minimal to non-existent. Royalty owners don’t have to invest in new properties, plants, or equipment to keep the business running. Once they have set up an income stream, the payments roll in like they’re on autopilot.
This allows owners to earn outsized yields. Payouts vary by industry, but it’s not uncommon to see royalty companies with yields as high as 12%, 15%, or even 23%.
I’ve highlighted a few of my favorites in the table below.
|Company Name & Stock Ticker||Industry||Yield|
|BP Prudhoe Bay Royalty Trust (NYSE:BPT)||Oil & Gas||22.7%|
|Cross Timbers Royalty Trust (NYSE:CRT)||Oil & Gas||10.1%|
|Mills Music Trust (OTCMKTS:MMTRS)||Music||8.6%|
|A&W Revenue Royalties Income Fund (OTCMKTS:AWRRF, TSE:AW.UN)||Restaurants||4.5%|
|Franco-Nevada Corp (NYSE:FNV)||Mining||0.9%|
(Source: Google Finance, last accessed February 5, 2020.)
As we discuss frequently on Income Investors, a big part of building financial independence is generating passive streams of income. This means owning real assets that produce steady cash flow.
This could include assets like real estate, dividend stocks, or private businesses.
But you can find great opportunities by looking outside the mainstream. For investors willing to do some extra digging, royalties present a great alternative to plain-Jane income investments.