Getting Started with Royalty Stocks

• Royalty companies own the rights to oil and gas wells. The earnings from the sales of the well production is paid to the trust stock holders as monthly or quarterly distributions. The Canadian royalty trust stocks are also known as Canroys and several trade on the U.S. stock exchanges. The largest Canroys available to U.S. investors are Penwest Energy Trust, symbol PWE and Pengrowth Energy Trust, symbol PGH. In March 2010, these stocks had distribution yields of 7.9 and 7 percent ,respectively. The Canroys are significantly larger companies than their U.S. counterparts. The largest U.S. energy royalty trusts are San Juan Royalty Trust, symbol SJT, Hugoton Royalty Trust, symbol HGT and Permian Basin Royalty Trust, symbol PBT. The U.S. trusts were yielding between 7.5 and 9 percent.
  
  

Trading with Royalty Trusts

• The nature of royalty trust stocks make them suitable as long-term income investments for buy-and-hold investors or for longer term trading strategies. Royalty trusts are an excellent choice to profit from rising energy prices, especially natural gas. The Canadian and U.S. trusts have a high proportion of gas wells, and rising gas prices will provide shareholders both increasing dividends and increasing share values. If natural gas prices are projected to decline, it is time to sell the royalty trust stocks.
  
  Royalty trusts are also good candidates for dividend capture strategies. Dividend capture involves buying the stock a few days before it goes ex-dividend, hold the stock long enough to collect the dividend, then sell. Dividend capture traders want to earn several extra dividends per year by trading stocks that pay their distributions in different calendar months.
  
  

Changes for Canadian Royalty Stocks

• In 2011 the tax law for Canadian companies is scheduled to change, eliminating the tax advantage for royalty trusts. It is expected that the royalty trusts will be converted to regular corporations and significantly reduce the dividend payouts. A savvy trader will wait for investors to dump their royalty stocks when the dividends are reduced or eliminated and pick up some Canadian energy assets on the cheap.