Definition
The term royalty trust refers to an investment trust that buys the rights to the production and sale of natural resources. Shares of a royalty trust typically trade on a stock exchange, while the assets in the trust are managed by an investment bank.
Explanation
Royalty trusts are financing vehicles run by investment banks and other large financial institutions. Investors can purchase shares of these trusts on a public stock exchange. As the name implies, royalty trusts purchase the right to royalties derived from the production and sale of natural resources including oil, coal, natural gas and other minerals.
As is the case with real estate investment trusts, the profits from royalty trusts are not taxed at the corporate level. Rather, the dividends paid to investors are taxed as personal income, thereby avoiding double taxation. Although the return on these investments is subject to changes in the price of the underlying commodity, they can provide investors with much higher yields than common stock.
Another advantage of these investments is they allow individuals to participate directly in the commodities space without the need to buy a futures contract, purchase a mine, or invest directly in an oil well.
