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Do You Have an Energy Royalty Trust?

Written By Nick Hodge

Posted April 4, 2012

If you’ve never caught a +100-pound tarpon, I suggest you do so immediately.

If you haven’t yet diversified your energy portfolio, I suggest you do that as well.

Here’s to both…Jumping Tarpon

Tarpon are one of the world’s most sought-after saltwater gamefish because of their great fighting and leaping ability.

The hurting they put on your arm and the airshow you get while battling one create a lifelong impression.

My dad and I flew to Islamorada, Florida, earlier this week to try to put a few in the boat.

Our guide took us to an abandoned bridge in the Keys backcountry on an 18-foot skiff.

The current around the bridge creates a funnel that holds baitfish, and that’s where the big tarpon like to wait for an easy meal.

We anchored up and tossed out a few baitfish hooked through the lip. A large cork bobber kept them near the surface.

This is the go-to method for catching a tarpon, but after seeing few large fish break the surface and even a few strikes at our bait, we still hadn’t hooked up.

That’s when the guide started cutting baitfish in half…

He threw the tail end overboard, and put the head-half on a hook with a sinker to get it to the bottom.

Not long after that… bam, fish on.

It was a +100-pound behemoth — and he was ready to fight.

We untied the anchor (you have to be able to chase the fish for these epic battles) and my dad got up on the bow for his heavyweight bout.

After more than a quarter hour and plenty of showing off by the fish, my dad had his first International Game Fish Association-recognized tarpon catch and release.

I got mine shortly after, again with cut-up bait sunk to the bottom.

Diversify

In this vacation week metaphor, tarpon fishing is like investing.

If your approach isn’t working — or you’re just in search of different results — you have to change your approach.

It’s no secret I’m a fan of the single stock. A well-researched play on an under-the-radar company is the fastest way to multiply your wealth.

But if you don’t have the stomach to let it ride on a single horse (or a single bait on topwater), you have to diversify your technique.

A great way to do that in the energy sector is with energy trusts.

Energy Royalty Trusts — like Real Estate Investment Trusts (REITs) — offer a safer way to play and generate substantial dividends. You can use them to safely invest in oil, gas, or metals while simultaneously creating a new income stream.

Unlike a company like Exxon (NYSE: XOM) or Chesapeake (NYSE: CHK), energy trusts don’t do any exploration or actual drilling.

Instead, the Trust owns the drilling rights or the land, and other companies pay it a royalty to harvest the energy.

Pretty straightforward stuff.

You make money because the Trust distributes those royalties as dividends to its shareholders.

Here’s the skinny from InvestorGuide.com:

Royalty trusts are popular with investors seeking a direct line of investment to commodity sources, without the business middlemen of an energy company; in other words, investors directly own a piece of the underlying properties. They provide investors with diversification in their portfolios across multiple commodity properties, as most trusts are invested in more than one kind of commodity such as minerals, metals or oil. As shares of the trusts trade on the open market during market hours, they are also easier to trade than futures contracts — the traditional way to invest in commodities.

And it gets better.

Regular companies have to pay tax on profits and any dividends paid to shareholders. This is the dreaded “double-taxation.”

Energy Royalty Trusts don’t have to pay corporate income tax and have to distribute up to 90% of their profits as dividends by law.

This means their dividends are higher than any other companies out there — and often reach as high as 15%.

You can reinvest the dividends to avoid capital gains tax, or pay full tax and use the money as a new source of income.

And it still gets better…

The Trust’s profits are tied purely to the commodity’s price. So the higher oil climbs, the more an oil trust — and its shareholders — makes.

Not to mention shares of Royalty Trusts tend to climb during inflationary periods because investors flock to commodities when currencies fall. Given the current world picture, things are looking good for this type of investment.

So if you haven’t given safer income investments some consideration, now is the time to start.

You can even find ones that focus on specific areas and formations that we describe right here in these pages, like the ECA Marcellus Trust (NYSE: ECT) or the Permian Basin Royalty Trust (NYSE: PBT), which pay a 10% and 7% dividend, respectively.

Once you’ve diversified your portfolio, then go catch a tarpon.

You can see more pictures and video from the trip right now by following me on Twitter.

Call it like you see it,

Nick Hodge Signature

Nick Hodge

follow basic@nickchodge on Twitter

Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street’s Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor’s page.

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