By design, they have no employees or physical assets, and most will cease to exist in 20 years or less. Their only value consists in the income they distribute. But their future payouts may well be a ghost of the yields that appear so attractive to today's investors.
Why are the yields on royalty trusts all but doomed to dwindle?
Unlike the more-familiar master limited partnerships, which often own or operate energy, mining or other assets, the typical royalty trust holds only the right to receive income from a fixed number of properties.
Once the trusts are set up, they are frozen and can't acquire any new interests to replenish their stream of income.
When their share prices are cheap, as many were in early 2009, royalty trusts can be a great investment.
But timing is everything, and many of these trusts are far from bargains today. Wells and mines tend to become depleted with each passing year, making a decline in yield almost inevitable unless commodity prices boom.
When there is no money left to pay out, most of the trusts will disappear—and, unlike bonds, they won't give investors their original principal back at the end.
So, when the financial statements of these trusts use the word "depletion," they mean it. According to Standard & Poor's, between 2007 and 2011, Hugoton Royalty Trust's dividends shrank to $1.41 from $2.09
Not much new on there - its a shame they did not put in the present value of HGT's future cashflows, which is way below current market cap. Based on that, HGT is as much of a buy as WHX and BPT are sells. Of course that would have belied the message of the article.