What will the golden rule mean for the Eurozone?
If you're new here, you may want to subscribe to my Newsletter. Thanks for visiting!
Stijn Verhelst, 1 March 2012
Eurozone countries have recently agreed to adopt a ‘golden rule’ for fiscal policy, forcing governments to be stricter about balancing their books. This column compares the golden rule to existing EU fiscal policies. It argues that the successful implementation of the golden rule would overturn much of the existing economic governance in the Eurozone to become the main determinant of fiscal discipline.
Full Article: What will the golden rule mean for the Eurozone?
This Incredibly Rare Investment Pays 10% Dividend Yields
February 29, 2012 by stanh
Filed under Misc. Articles
I first uncovered this asset class years ago, when I started my High-Yield Investing advisory in 2004. In October of that year, I added one of these securities to my portfolio at .33. I sold it for .51 about two years later. Along with .93 in distributions, my total returns were a little more than 80%.
Another one of these rare investments has also done well for current High-Yield Investing subscribers. I added it to my portfolio in late October 2010. I've received .28 per unit in distributions and the price has soared. So far, total returns are more than 50% in just 16 months.
I like to return to investment ideas that have done well for me. So it comes as no surprise that I'm again looking into one of the highest-yielding, yet rarest, income investments on the market — royalty trusts.
These trusts are designed for one thing: to pay out royalties, or a share of production revenue, from a field of existing oil and natural gas wells.
The first trust debuted in 1979. Amazingly, even after more than 30 years, there are still only about two dozen publicly traded oil and gas royalty trusts. And between 1999 and 2007, no new royalty trusts were created.
But in the past year, there has been a small renaissance in royalty trusts. I count four new trusts that have come to market in the past two years alone.
For income investors, the sudden surge of interest is good news. Routinely providing yields of about 10% or more, royalty trusts can seem too good to be true. Why, then, are oil and gas companies spinning off properties into publicly traded trusts?
Money.
Trusts allow the parent company to get full value for their reserves while also raising money, without diluting their common shares or going further into debt.
But there is one potential hang-up. By definition, these new trusts don't have an established track record of generating cash flow from their reserves. Instead, you must rely on the company's production projections and price assumptions, as stated in the prospectus.
That's the downside. But it's offset by at least two benefits.
First, recent trusts are being formed for a set life or "term" of 20 years. For example, SandRidge Permian Trust (NYSE: PER) was formed on May 12, 2011, and will dissolve by March 31, 2031. The parent company or sponsor endows the trust with proven reserves that have high-probability development opportunities to ensure the term is fulfilled.
In contrast, many older trusts formed in the early 1980s have consumed much of their original reserves. Although new production technologies have allowed them, in some cases, to draw more production from their reserves than originally anticipated, they still have a much shorter remaining reserve life. The average reserve life for older royalty trusts is about 8.3 years, compared with 20 years for some of the newer trusts.
Once the reserves are used up, a trust expires and any remaining assets are distributed to unitholders. It can't issue equity or debt to acquire new reserves.
A second benefit is some new trusts have created "subordinated units." (Royalty trust shares are called units.) These units, which are held by the trust's sponsor, support the distribution rate to common unitholders.
They work like this. When SandRidge Permian was created, sponsor SandRidge Energy (NYSE: SD) set aside 25% of the outstanding units for itself as subordinated units. These units are also entitled to receive distributions… with a catch.
The trust forecasts target distributions for several years in advance, based on projections of production volumes, commodity prices, the effect of hedges, expenses and taxes.
Then a subordination threshold is also established. For the SandRidge Permian Trust, the threshold is 20% below the target distribution. If the distribution ends up being less than the subordination threshold, then the sponsor will make up the difference by reducing or foregoing the distribution on subordinated units. This way, there is some assurance that distributions will reach a predetermined level should commodity prices fall.
In return, if the distribution is substantially higher than the target, then the subordinated shares will receive an extra share of distributions.
These subordinated shares don't last forever. The parent company retains these subordinated shares until new wells that the trust is also required to drill are completed. Then, a year later, the subordinated shares convert to common shares.
Risks to Consider: Now before you dive into any trust, there is plenty more to know. Taxes are a little trickier than with a common stock, and trusts will perform differently based on their hedging programs and their production mix of oil and natural gas (I detail all of this in my March issue of High-Yield Investing).
Action to Take –> But if you're looking for a place to still capture high yields when interest rates are near zero, this sector may be small, but also holds plenty of promise.
– Carla Pasternak
This article originally appeared on StreetAuthority
Author: Carla Pasternak
This Incredibly Rare Investment Pays 10% Dividend Yields
Hong Kong stocks fall, with banks, property shares weaker; Hang Seng Index down 0.6%
Hong Kong stocks fall, with banks, property shares weaker; Hang Seng Index down 0.6%
MarketWatch.com – MarketWatch Breaking News Bulletins
Wall Street cash bonuses fell 14% last year
Decline led by weak performances in investment banking and a shift towards deferred compensation as an element of pay
Forex Flash: China’s additional 50bp cut to RRR by end H1 still in the horizon … – Forexrazor
|
Forex Flash: China's additional 50bp cut to RRR by end H1 still in the horizon …
Forexrazor High-Risk Warning Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, … |
China’s HSBC Manufacturing PMI @49.6 vs. 48.8 Prior
Forex News and Commentary by FXDD » Forex Trading
Japan’s Softbank wins key spectrum: report
LOS ANGELES (MarketWatch) — The mobile-carrier unit of Japan’s Softbank Corp. won key spectrum to improve its signal quality in the country, Kyodo News reported. The Ministry of Internal Affairs and Communications awarded the “coveted” 900-megahertz frequency on Wednesday, the report said, allowing Softbank to better compete against larger rivals NTT DoCoMo Inc. and KDDI Corp. . DoCoMo and KDDI currently use an 800-MHz band in the 700-900 MHz range known as a “platinum band” for its reception quality, the report said.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Blackstone founder tops private equity pay league
Steven Schwarzman took home 3.5m in pay and dividends in 2011, a third more than the year before
GBP/AUD Long Opportunity at 1.4639
A bullish Gartley pattern is forming on the GBP/AUD.
Commentary from Brad Gareiss and Matt Weller, Technical Analysts, GFT
Forex: AUD/USD pushes higher ahead of key China data – NASDAQ
|
Forex: AUD/USD pushes higher ahead of key China data
NASDAQ FXstreet.com (San Francisco) – AUD/USD climbed well into the 1.0850 zone at 6-month highs overnight, but was hit by risk aversion during the US session and slid nearly 150 pips before stalling at 1.0714. As Valeria Bednarik, Chief Analyst at … |
