Investors can make big money from unknown and misunderstood companies. Recently, I found a spinoff whose fat dividend is "guaranteed" for the next four years. The large dividend and the fact that the company is a spinoff have me excited that this stock could produce huge returns over the years ahead.

The stock is SandRidge Mississippian Trust I (NYSE: SDT), a royalty trust that was spun off from SandRidge Energy (NYSE: SD). Royalty trusts entitle unit holders (shares in publicly traded partnerships are called units) to profits from specific mineral properties. Like master limited partnerships, or MLPs, they are taxed differently from normal corporations and have some tax advantages for long-term shareholders. A key difference, however, is that royalty trusts represent a share of proceeds of a depleting asset. There's only so much oil in a given area that can be profitably drilled. With that said, royalty trusts have a history of being great dividend performers. For instance, long-ago BP spinoff BP Prudhoe Bay Royalty Trust (NYSE: BPT) is the top dividend stock so far this millennium.

I'm hoping SandRidge Mississippian Trust can be as successful. The trust was spun off by SandRidge just last month with SandRidge retaining a 38.4% stake. The stock is so new that Yahoo! Finance doesn't even have a yield for the trust on its site. Don't be fooled; enterprising investors who dig deeper will find that is just not the case.

The trust owns royalty interests in oil and natural gas properties leased by SandRidge in the Mississippian formation in Oklahoma. These royalty interests entitle the trust to receive 90% of the proceeds from 37 horizontal wells that are already producing oil and gas. The interests also entitle the trust to receive 50% of the proceeds from 123 horizontal wells that are still to be drilled. SandRidge is obligated to drill the 123 wells by December 31, 2015.

The trust then will use these proceeds to pay out the following distributions to shareholders.



2011 $1.85
2012 $2.25
2013 $2.42
2014 $2.70
2015 $2.41

Source: Company prospectus.

At a recent price of $25, that's a yield of 7.4%. The distributions above, however, are the "guaranteed" payments -- the actual distributions will likely be much higher. I'll explain the guarantee in a moment.

The opportunity
The trust actually expects to pay out much higher distributions based on reasonable estimates of future production and hedges on 70% of the trust's expected oil production, locking in today's high prices and holding out for the possibility of higher natural gas prices in the future.

The following table lays out the trust's expectations:


Target Distribution

2011 $2.31
2012 $2.82
2013 $3.03
2014 $3.36
2015 $3.01

Source: Company prospectus.

A $2.31 per-unit distribution equals a yield of 9.2%. That figure clearly surpasses other oil royalty trusts:


TTM Yield

Distributions Per Share

Permian Basin Royalty Trust (NYSE: PBT) 5.7% $1.24
BP Prudhoe Bay Royalty Trust  8.2% $9.57
San Juan Basin Royalty Trust (NYSE: SJT) 4.0% $0.99
MV Oil Trust (NYSE: MVO) 7.9% $3.28
Hugoton Royalty Trust (NYSE: HGT) 5.1% $1.23
ECA Marcellus Trust I 7.0% $2.00
Average 6.3%  

Source: Yahoo! Finance.

Based on other oil royalty trusts, the average yield is a little more that 6%. If SandRidge Mississippian were to trade with a comparable yield, the trust's units would trade for $36, or 45% higher than where they've traded recently.

The guarantee
As stated earlier, SandRidge owns 38% of the trust. Its portion is divided into 3.75 million regular shares (13% of the total units) and 7 million subordinated shares. Until SandRidge drills the 123 wells as it is obligated to, if the trust cannot pay the minimum distributions above to all trust holders, the money is taken from the subordinated shares to pay out the minimum distribution. SandRidge's shares thus "guarantee" trust holders will get the above minimum distributions. Twelve months after SandRidge fulfills its drilling obligations, the company's subordinated units turn into regular units, and then all royalties are split as would be normal.

Foolish bottom line
With a 9% distribution, SDT's units are definitely worth a look, especially if you believe in higher oil prices in the future and appreciate a margin of safety with the subordinated units.

Given the tax considerations of publicly traded partnerships, the units may not be for everyone. For those looking for dividends for their retirement accounts I invite you to take a look at 13 other dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.