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. Trust

    A fiduciary relationship in which one party, known as a trustor, ...
  4. Royalty

    A payment to an owner for the use of property, especially patents, ...
  5. Special Purpose Vehicle/Entity ...

    1. Also referred to as a "bankruptcy-remote entity" whose operations ...
  6. Equity Unit Investment Trust

    A registered trust in which investors purchase units from a fixed ...
Related Articles
  1. Oil: A Big Investment With Big Tax Breaks
    Investing Basics

    Oil: A Big Investment With Big Tax Breaks

  2. Income Funds 101
    Mutual Funds & ETFs

    Income Funds 101

  3. An Introduction To Canadian Income Trusts
    Options & Futures

    An Introduction To Canadian Income Trusts

  4. Forget About Falling Oil, Look Into ...
    Chart Advisor

    Forget About Falling Oil, Look Into ...

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center