I think it is time to expand the discussion of real estate trusts beyond just REITs.

As I discussed in my previous newsletter, oil and most commodity prices in general are likely in the beginning stages of a long uptrend.

Why?

Over the time period from 1983 to 2000, the price of oil and most other commodities barely budged. This reduced the financial incentive to invest in new oil and mineral resource projects. Meanwhile, over those 20 years, the world population increased substantially and the standard of living continued to rise. Energy demands are now straining most available reserves and it will take years to build the infrastructure that can sustain the current and growing world energy needs. The result is a classic supply and demand imbalance that could last for a decade or longer.

So how do you play this situation?

I have already talked about oil sand stocks, possibly a great long-term play from a sheer capital gains perspective, but something not without risk.

However, if you are looking for another way to participate in oil and mineral income with less risk, you might want to look at another trust that relies on real estate holdings for generating profits.

You already know that I believe in real estate and the steady income string it can produce. With this philosophy in mind, I think investing in oil, gas and mineral trusts is another option for anyone to consider. Oil, gas and mineral trusts represent ownership of the royalties earned by a pool of properties that produce income from mineral rights. Because mineral trusts pay out most of their income in dividends, yields can be high, ranging from 5% to more than 10%.

For example, Pengrowth Energy Trust (PGH) is an oil and gas trust that owns mineral interests on properties that produce oil and gas income. Based in Canada, the current dividend yield on PGH is almost 11% and income at PGH has been steadily increasing over the last few years due to rising energy prices. Debt is reasonable at about 30% of total equity and management is conservative in their acquisition of properties. For more information, here is the link to PGH:

There are also mining trusts. Fording Canadian Coal Trust (FDG) is a trust that holds mineral interests in a property that produces metallurgical grade coal, or met for short.

What is met?

Coal comes in grades and met is the higher-grade coal. When you burn coal, the higher the grade, the hotter the fire. When you need to melt steel, you want met coal. This puts FDG in a good situation when met coal supplies are tight, like now with all the building going on throughout the world.

Unfortunately, FDG's strong growth potential has not gone unnoticed over the last few months and its stock price has run up quite a bit. If the stock price would pull back 15% to 20% it would be a better buy.

Overall, gas, mineral and oil royalty trusts look promising over the next decade, especially if you are looking for income with some growth. I invest in oil and gas trusts for the same reason I invest in REITs. Hard assets that can be valued more easily than the assets of "paper" companies back real estate, including the mineral rights associated with real estate properties.

Are there any drawbacks to investing in mineral resource royalty trusts?

Yes. As the mineral resources of the trust are depleted, they need to be replenished; and if commodity prices fall, dividend payments may need to be cut. Good management can usually keep finding more properties if excess income is available, but it is best to find mineral trusts that already have large reserves that could last for many years. The total amount of mineral, oil or gas reserves can be found in the annual report. Also, this information is usually present on most trust websites. I usually look at the total reserves compared to the rate they are being used up each year and try to make sure this number is 10 years or greater.

Finally, like any other publicly traded company that includes a strong income component, I look for sane management, low debt and steady increases in dividend payments.

In the end, these trusts represent a good balance of income and growth and a way to participate in the ownership of mineral interests that would be difficult to afford otherwise.

Happy investing,

Bryan Rundell