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. Unit Investment Trust - UIT

    An investment company that offers a fixed, unmanaged portfolio, ...
  6. Equity Unit Investment Trust

    A registered trust in which investors purchase units from a fixed ...
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. Economics

    Iron Ore Market: Falling Into The Hands Of A Few

    The big iron ore mining companies have embarked on a drive to increase supply, reduce cost, and take market share.
  5. Stock Analysis

    Why Is Enterprise Products Partners So Excited?

    Enterprise Products Partners has historically gone on the offensive to acquire weaker rivals in a tough spot when the commodity market turns down.
  6. Stock Analysis

    Is It Time To Start Buying Seadrill?

    West Texas Intermediate oil prices have collapsed from nearly $110 to less than $44 recently, crushing producers, contract drillers, and oil service stocks
  7. Investing

    Will Clean Energy Fuels Create A Better Network?

    Ever since the most recent U.S. energy boom began, many people have looked for ways to take advantage of cheap natural gas from shale gas areas.
  8. Investing

    Is Caterpillar Here To Stay?

    Because Caterpillar is the largest construction and mining equipment manufacturer in the world, investors can count on it to keep paying dividends.
  9. Investing

    Windstream's Strategy For Dividend Investors

    Windstream Holdings has been among the top dividend-paying stocks in the market, with double-digit percentage yields that have stood the test of time.
  10. Investing

    What Is The Real Picture Of Linn Energy?

    Numbers don't always tell the full story. Take, for example, the long-term chart for LINN Energy which was expected to be down more than 40%.

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center