Should You Trust the Highest-Dividend-Paying Stocks in Energy?

Energy trusts are among the more popular stocks in energy these days. That popularity is due to one important factor, these trusts are among the highest-paying dividend stocks in the market. Let's drill down a little deeper into some of the more popular energy trusts to see if these are worth your trust and your investment dollars.

BP Prudhoe Bay Royalty Trust (NYSE: BPT  )
Created in 1989, the property of the BP Prudhoe Bay Royalty Trust consists of an overriding royalty interest of oil and condensate production from BP's Prudhoe Bay oil field located on the North Slope in Alaska. The trust makes quarterly payments to investors of the income after expenses, which can vary each quarter. Over the past year the trust has paid out an average of $2.22 per quarter which would imply a yield of around 9.4%. The key point that investors must understand is that the oil in the field is a finite resource, meaning that it will run out. Under current projections it's expected that the trust will run dry around the year 2029.

Chesapeake Granite Wash Trust (NYSE: CHKR  )
Created by Chesapeake Energy, the Granite Wash Trust owns royalty interests in 69 currently producing wells and 118 wells that are still to be drilled in Oklahoma in an area of mutual interest. The wells within the trust are producing out of the Granite Wash formation of the Anadarko Basin. As you can see on the map below, the trust has a very focused area of interest.

Source: Chesapeake Granite Wash Trust

Over the past year the trust has paid an average of $0.65 in distributions each quarter, which would imply a yield of around 17.5% and puts it among the highest-dividend-paying stocks on the market today. Again, like the Prudhoe Bay Trust, the yield will fluctuate over time while the income here is expected to run dry in 2031.

SandRidge Mississippian Trust I (NYSE: SDT  ) and Trust II (NYSE: SDR  )
These trusts were created by SandRidge Energy (NYSE: SD  ) , with the first Mississippian Trust formed in 2010 and the second formed one year later. Both trusts own royalty interests in oil and gas properties targeting the Mississippian formation and have future upside as SandRidge drills wells as part of the areas of mutual interest.

Over the past year, the first trust has paid an average of $0.66 per quarter, which equates to a yield of about 18%; however, it is important to note that the trust's distribution has fluctuated by almost $0.20 over the past year and a half. The second trust has averaged a payout of $0.47 per quarter which would equate to an average yield of 14%. Here again, the trust's high dividend has fluctuated since it went public with a move of more than $0.30 per unit. One of the contributing factors is that some of the wells SandRidge has drilled recently had much higher natural gas volumes than expected. 

These two trusts might be among the highest-dividend-paying stocks in the market, but those distributions are driven by the volume of oil and gas flowing out of the wells and have the potential to be highly volatile as commodity prices move as well. The other thing to keep in mind is the relationship to SandRidge Energy. These trusts were created to help fund the growth at SandRidge, so you need to understand that relationship before investing your hard-earned money. These trusts should provide investors with substantial income over the long term, even though the wells will eventually run dry.  

Key takeaways for investors
It seems like there is always a catch when it comes to investing, and when it comes to the highest-dividend-paying stocks in energy there is not one, there are two. First, the distributions paid by these trusts can be as volatile as the commodities that are produced, meaning that the payouts can shift significantly from quarter to quarter. Further, unlike a dividend-paying stock or a master limited partnership, there is an expiration date for the income as the underlying oil and gas wells will run dry. While those expiration dates are decades in the future, it is something to keep in mind if you are planning on trusting one of these companies to see you through your golden years. While these trusts might make a good addition to your portfolio, if you are looking for steady retirement income, then you are better off looking elsewhere. 

Finally, if you are planning on digging a little deeper into the SandRidge trusts, you might want to drill down into SandRidge itself first. If you'd like to learn more about the future of this emerging oil and gas junior, then check out The Motley Fool's premium research report detailing SandRidge's game plan and what to expect from the company going forward. To get started, simply click here now!


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2013, at 4:43 PM, Prudent1959 wrote:

    Have you ever heard of advanced oil recovery? That will extend the oil recovery beyond anyone's terminal life of the oil reserve. Every one tries to scare trust holders with the premature extinction of BPT royalties.

  • Report this Comment On June 13, 2013, at 6:49 PM, TMFmd19 wrote:

    Hi EDiClemente - The date used in the article isn't to scare, its the date that's in the 10-K: http://quote.morningstar.com/stock-filing/Annual-Report/2012...

    "it is estimated that royalty payments to the Trust will continue through the year 2029. BP Alaska expects continued economic production from the Prudhoe Bay field at a declining rate after that year; however, for the economic conditions and production forecast as of December 31, 2012 the Per Barrel Royalty will be zero following the year 2029."

    Best,

    Matt

  • Report this Comment On June 17, 2013, at 12:58 PM, REDHEAD751 wrote:

    WHAT IF YOUR TIME FRAME IS LIKE 5 TO 7 YEARS...WOULD YOU RECCOMMEND?

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