There's nothing like a giant tech IPO to generate buzz about how terrible it is to buy into IPOs right now. Just last week, fellow Fools Dan Caplinger and Sean Williams did an excellent job documenting the downside of investing in today's IPO market. But not all IPOs are created the same, and safe investments do exist.
The IPO king
The safe IPO investments I'm talking about are royalty trusts -- oil and gas royalty trusts in particular. Using the same criteria that Sean put forth in his breakdown of the failed IPO market of 1999, here are three of last year's trust IPOs.
|
Company |
IPO Price |
First-Day Close |
Percentage |
Current Price |
Change Since |
|---|---|---|---|---|---|
|
SandRidge Mississippian Trust I |
$21.75 | $24.21 | 11% | $36.22 | 67% |
|
SandRidge Permian Trust |
$18.00 | $18.00 | 0% | $23.45 | 30% |
|
Chesapeake Granite Wash Trust |
$19.00 | $18.87 | (0.68%) | $28.00 | 47% |
Source: Yahoo! Finance.
Unlike many of today's IPO traps, these trusts don't blow up on the first day of trading. And unlike the tech IPOs that see the flashy become flash-in-the-pan companies, royalty trusts are often an extension of already proven oil and gas operations, as is the case with the parent companies represented above: SandRidge Energy
These trusts focus on regional development -- covering the Mississippian, Permian, and Granite Wash areas, respectively -- as their names suggest. But more broadly, they're vehicles that facilitate a symbiotic relationship between parent company and investor. The parent company uses the funds raised in the IPO to fund drilling and production costs, and the investor profits from quarterly unit payments.
Payouts typically follow a production parabola, meaning that initial payments climb, hit a peak after a few years, and then gradually decline as production does. Most trusts expire after 20 years. This concept translates to realistic investor expectations and eliminates a lot of the volatility that other IPOs face.
Take a look at the performance of these trusts from inception through Friday's trading activity.
SandRidge Mississippian Trust I Stock Chart by YCharts.
Outside of a marketwide dip in October, the trusts perform pretty consistently.
Foolish takeaway
SandRidge plans to launch a new royalty trust in 2012. The IPO date has yet to be announced, but when it is, investors shouldn't be afraid to take advantage.
Royalty trusts are just another example of how investors can profit from dividends and unit payments. If that sort of thing interests you, consider checking out 11 more ideas with the Fool's special free report "Secure Your Future With 11 Rock-Solid Dividend Stocks."
