How to Invest in an Oil Trust

Oil trusts offer diversity to a traditional investment portfolio.

Oil trusts offer diversity to a traditional investment portfolio.

Investors who are seeking an alternative to stocks and bonds to diversify their portfolios may be interested in oil trusts. These trusts, referred to as royalty trusts, own the rights to oil and gas wells and collect royalties from third parties who extract the resources from the property. These royalties are then distributed in the form of dividends to investors. Investing in an oil trust, as with any investment selection, requires a bit of research to ensure its suitability in terms of the investor’s financial goals.

Investment Amount

Determine the amount of money that will be invested in the oil trust. The amount of the initial investment will determine whether the investor will be utilizing the services of a broker or conducting the transaction himself. Many brokers will not handle investment transactions of less than $10,000.

Research

Compare and contrast multiple oil trusts to determine which one is a better fit for the investor’s overall strategic plan. Many sites, such as DividendYieldHunter.com and SeekingAlpha.com, offer financial statistics, such as the current market value, as well as future profit and dividend projections.

Obtain a Prospectus

Contact the oil trust of choice to obtain a prospectus and collect as much information as possible to make an informed investment decision. If a broker is being utilized, she will contact the trust to obtain this information for the client. While it is not possible to predict actual future earnings, this information can assist in determining whether or not the trust is in line with the risk tolerance and potential earning level of the investor.

Ask Questions

Ask questions to clarify any information that is unclear prior to signing any paperwork. It is important to understand not only the benefits of investing in an oil trust, but also the risks. For example, a less experienced royalty trust investor may not realize that royalty trusts are interest-rate sensitive or that the natural resources owned by the trust eventually will be depleted. Be sure to have a thorough understanding of how these factors can potentially affect the anticipated rate of return.

Complete the Transaction

Sign all required legal documents associated with the trust agreement and submit payment of all required monies including the investment amount and applicable fees, such as program management and account maintenance fees. The investor will begin receiving payments as outlined in the prospectus. Dividends are typically paid out quarterly, but could also be paid out on a monthly or semi-annually.

About the Author

Based in Virginia, Amanda Banach has been a writer since 2009. Her professional work experience includes roles in media advertising, financial services and human resources. She holds a Bachelor of Arts in human resources management and is PHR-certified.

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