Royalty Income Trust

AAA

DEFINITION of 'Royalty Income Trust'

A type of special-purpose financing created to hold investments or their cash flows in operating companies. These trusts are neither stocks nor bonds but investment trusts (a legal entity). Royalty trusts buy the right to royalties on the production and sale of a natural resource company and pass on the profits to trust unit holders.

INVESTOPEDIA EXPLAINS 'Royalty Income Trust'

Royalty trusts are attractive to investors because they promise high yields compared to stocks and bonds. They are attractive to companies wishing to sell cash-flow producing assets because they provide a much higher sale price than what is possible with conventional financings.

For example, suppose that ABC oil company has maturing oil wells with well-known rates of production and reserves. The company estimates that it will produce and sell one million barrels per year for the next 20 years at a price of $20 per barrel (thus $20 million per year). ABC wants to sell the wells, but an investment bank suggests that ABC use a royalty trust, so ABC sells all the oil wells to a trust, the XYZ Royalty Fund. ABC receives a payout from the investment bank and will still manage the company for a fee.

RELATED TERMS
  1. Specified Investment Flow-Through ...

    A type of income trust that holds publicly traded investments, ...
  2. Canadian Royalty Trust - CANROY

    An oil, gas or mineral company that is organized as a trust rather ...
  3. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
  4. Unit Trust - UT

    An unincorporated mutual fund structure that allows funds to ...
  5. Real Estate Investment Trust - ...

    A security that sells like a stock on the major exchanges and ...
  6. Unit Investment Trust - UIT

    An investment company that offers a fixed, unmanaged portfolio, ...
RELATED FAQS
  1. Which insurance companies pay the highest dividends?

    For income investors, finding companies that pay above-average dividends consistently is key to creating and sustaining a ... Read Full Answer >>
  2. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  3. What is the average annual dividend yield of companies in the electronics sector?

    The chemicals industry is part of the basic materials sector which, as of 2015, is the highest dividend-paying sector on ... Read Full Answer >>
  4. What are the differences between a bond's yield to maturity and the spot rate?

    One should expect income when buying stocks in the consumer packaged goods sector. This sector is considered a defensive ... Read Full Answer >>
  5. Which companies in the chemicals sector pay the highest dividends?

    Insurance companies offer an appealing option to investors looking for steady income investing, since insurers usually pay ... Read Full Answer >>
  6. What are some examples of just in time (JIT) inventory processes?

    The chemicals sector represents an attractive option for investors looking for companies with stable growth potential. The ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Oil: A Big Investment With Big Tax Breaks

    Oil and gas investments can provide unmatched deduction potential for accredited investors.
  2. Mutual Funds & ETFs

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  3. Options & Futures

    An Introduction To Canadian Income Trusts

    Yields in excess of 10% aren't rare, but these unique investments need to be chosen very carefully.
  4. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  5. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  6. Chart Advisor

    Commodity Traders are Watching These 3 Charts

    As we head towards the summer months, many commodity traders are looking to diversify their holdings and to protect themselves against inflation.
  7. Charts & Patterns

    Should Investors Get Into Oil Now?

    Oil has enjoyed a steady climb after a violent plunge. Where is it going next, and how can investors profit?
  8. Economics

    The Big Chill: What’s Wrong With The U.S. Consumer

    Based on the most recent April data, investors may, once again, be disappointed when the second-quarter gross domestic product (GDP) report comes in.
  9. Mutual Funds & ETFs

    5 Dividend ETFs with Growth Potential

    A quick look at a few ETFs with substantial growth potential.
  10. Personal Finance

    Can Electric Cars Replace Gas Guzzlers?

    High costs and poor battery performance have deterred many from switching to electric cars, which begs the question: can electric cars replace gas guzzlers?

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center