For the sake of brevity, I’ll just phrase my question first, then do some background for anybody who’s curious and doesn’t know what the hell I’m talking about.
I have positions in a couple energy canroys as income generating investments - probably about 5% of my total portfolio. The last couple of years, canroys as a group have done very well - not only paying a 10-12% divy, but gaining in value along the way - something I regard strictly as a bonus, since the dividend is the real point of royalty trusts. I wonder:
a) something tells me that the appreciation can’t go on indefinitely. Does anybody have any insights as to when, and how severely these things are likely to correct? They all hiccupped rather hard yesterday, possibly with the Fed announcement.
b) I was surprised this year to have about a 60% ROC (return of capital). I checked, and all of them across the board seem to have huge ROC portions this year. 15-20% is what I might consider “normal”. What machination are they all going through to cause this? Pumping like hell out of all their fields while oil prices are high? I’m not going to try to follow how the oil markets should be hedged on a day-to-day basis - that’s what I have to rely on the management of the trust for. But I am curious.
--------- background (US-centric) --------
A “royalty trust” is an investment vehicle that holds some resource, oil and gas fields being the most common, in trust for the investors, and pays out dividends on the income from exploiting the resource. Usually, the original owner of the resource sold it to the trust for a lump sum. They are usually very high yielding. A caveat is that since they are exploiting a natural resource, it is eventually depleted, and the assets held by the trust become worthless. This isn’t neccesarily horrible, as long as you’re aware of it, and know the kind of horizon you are looking at. Canadian trusts (“canroys”) are attractive because they operate under different laws than US trusts and are allowed to acquire new resources along the way, so they can theoretically keep going.
Another factor you have to be aware of is that part of the dividend payout will be “return of capital” - they are giving you part of your investment back. In the short run, you might think it’s “free money” because it turns up in the “non-taxed distribution” box of your 1099’s, and Uncle Sam doesn’t take a bite out of it. However, you have to subtract that amount from your cost basis, and it eventually turns up as capital gains when you sell your shares in the trust. If your cost basis goes to zero, which can happen if you keep a royalty trust for a long time, you have to start paying capital gains on that part of the distribution.
For canroys, you will also have 15% Canadian tax taken out of the distributions, which you have to recover as a foreign tax credit. Annoyingly, in January Canada changed the rules and started taking it out of distributions in sheltered accounts like IRAs (before then they only zinged unsheltered accounts). At this point, it appears that there is no way to recover that. There are a LOT of Americans with canroys in their IRAs who are disgruntled about this now, though it seems that a lot of them are just bitching and deciding that 85% of the high yield is still pretty high, so they aren’t dumping.
Which brings us to another point concerning canroys - the Canadian government is not very happy with the level of foreign (mostly American) ownership in them, and keeps threatening to do something about it. They supposedly operate under rules which require at least 50% Canadian ownership, and many of them have trouble with this requirement.
Obviously, like any foreign investment, a canroy also exposes you to foreign currency considerations, since the dividend is declared in Canadian dollars (though it’s actually paid to you in American if you invested through the NYSE).
NYSE symbols for some of them - PTF, PVX, PWI, ERF.