Shares of BP Prudhoe Bay Royalty Trust (BPT -0.38%) -- the entity that derives income from oil major BP's (BP 0.81%) drilling activities in Alaska's Prudhoe Bay -- fell 36.6% in July, according to data provided by S&P Global Market Intelligence.
The stock's fall, combined with a dividend increase over the prior quarter, helped to boost the trust's dividend yield to an astonishing 36.8%. However, don't rush out and buy shares based on that number. There's a lot of context you need to know.
The big catalyst for the drop was the trust's announcement that its quarterly dividend payout for Q2 2019 would be $0.55 per unit. That's an increase from Q1's $0.345 per unit, but it's a big drop from 2018's payouts of $1 to $1.50 per share, per quarter.
BP Prudhoe Bay Royalty Trust is structured so that its income is fixed: The trust receives a royalty on the first 90,000 barrels of oil per day pumped out of BP's Prudhoe Bay assets. So any potential increase in production wouldn't matter to investors. After paying the trust's minimal expenses, investors receive the rest of the money as dividends. When West Texas Intermediate (WTI) crude oil prices are high, the trust receives a higher royalty and pays more in dividends. When WTI crude prices are low, the opposite happens. And crude prices have been much lower so far in 2019 than in 2018. The trust is also increasing its cash reserves, which has an impact on the payout as well.
With the dividend payout substantially lower for a second consecutive quarter, it's likely that investors are just giving up and deciding to put their money elsewhere.
A 36.8% yield might look very tempting, but remember, the payout isn't fixed, so that yield is guaranteed to fluctuate with oil prices, which have been volatile recently.
Another reason to be wary of that big yield is that the amount of oil BP can extract from Prudhoe Bay is finite. If production dips below a certain level, the trust will simply liquidate, which would cause the share price to suddenly plunge. That could come as early as this year, but BP's current estimates indicate it may not happen until 2022. Either way, this is going to be a short-lived investment with no guarantees. Buy at your own risk.