Updated on July 9th, 2021 by Bob Ciura
Income investors often find high-yielding stocks to be attractive, due to the income that these investments can produce. But sometimes the need for income can blind investors to the issues with the company itself. If this is the case, then investors can be blindsided when the company cuts its dividend.
The same can be said for monthly dividend paying companies. Investors might overlook weak fundamentals with a company in order to obtain monthly dividend payments. Monthly dividend stocks can be appealing as they create more regular cash flow for investors.
There are fewer than 60 monthly dividend stocks we cover. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
But investors shouldn’t buy a high yield monthly dividend paying stock simply because of its monthly payments. This is particularly true when it comes to oil and gas royalty trusts.
Permian Basin Royalty Trust (PBT) fits the description of a dividend stock with a questionable outlook. Distributions have fallen steadily since 2014. As a result, shares only yield 3.5% based on its annualized distributions over the first 6 months of 2021.
This article will look at Permian Basin’s business, growth prospects and dividend to show why investors should avoid this stock.
Permian Basin holds overriding royalty interest in several oil and gas properties in the United States. The trust is a small-cap stock which trades with a market capitalization of less than $300 million. The trust has oil and gas producing properties in Texas.
The trust was established in 1980 and has a 75% net profit royalty interest in the Waddell Ranch properties. These properties consist of over 300 net productive oil wells, over 100 net producing gas wells and 120 net injection wells.
Permian Basin also holds a 95% net profit royalty interest in the Texas Royalty Properties, which consist of approximately 125 separate royalty interests across 33 counties in Texas covering 51,000 net producing acres. PBT had royalty income of $20.5 million in 2019 and $12.0 million in 2020.
As an oil and gas trust, it goes without saying that Permian Basin will perform in direct relation to oil and natural gas prices. Investments like Permian Basin are designed as income vehicles. Higher energy prices will likely lead to higher royalty payments, driving up demand for units. The same, however, is also true. Lower energy prices will lead to lower dividend payments.
Distributions are based on the price of natural gas and crude oil. Permian Basin is impacted in two ways when the price of either declines. First, distributable income from royalties is reduced, lowering dividend payments. In addition, plans for exploration and development may be delayed or canceled, which could lead to future dividend cuts.
In mid–May, PBT reported (5/17/21) financial results for the first quarter of 2021. Its average realized price of gas jumped 67% but its average realized price of oil decreased –24% over last year’s quarter. Despite a 7% increase in oil production, total royalty income plunged –66% due to increased drilling costs on the Waddell Ranch properties, which eliminated the royalty from these properties.
The performance of PBT was disappointing compared to its peers Sabine Royalty Trust (SBR) and Cross Timbers Royalty Trust (CRT) due to the high operating expenses on the Waddell Ranch properties. PBT has paid low distributions over the first half of 2021, even though oil and gas prices have returned to pre–COVID levels.
Thanks to the elevated commodity prices, we expect PBT to improve its results later this year, though the timing of the recovery is uncertain.
Royalty trusts are usually owned for their dividends. These investments are not likely to have multiple decades of dividend growth like the more well-known dividend paying companies like Johnson & Johnson (JNJ) or Procter & Gamble (PG). That is because trusts like Permian Basin depend entirely on the price of oil and gas to determine dividend payments.
Listed below are the trust’s dividends per share over the last seven years:
- 2014 dividends per share: $1.02
- 2015 dividends per share: $0.34 (67% decline)
- 2016 dividends per share: $0.42 (24% increase)
- 2017 dividends per share: $0.63 (50% increase)
- 2018 dividends per share: $0.66 (4.8% increase)
- 2019 dividends per share: $0.42 (36% decline)
- 2020 dividends per share: $0.235 (44% decline)
Dividends come directly from royalties, so higher oil and gas prices will likely lead to distribution growth. Given this, it shouldn’t come as a surprise that shareholders of Permian Basin saw a significant decline in dividends during the 2014 to 2016 oil market downturn.
As oil prices stabilized following this downturn, the dividends returned to growth again. And, as you can see, the dividend growth was extremely high as energy prices improved. Still, dividends haven’t returned to their 2014 level following the last decline in energy prices.
The trust has distributed $0.096499 over the first six months of 2021. Annualized, this would come out to a distribution of roughly $0.193 per share for the full year. This would again represent a year-over-year decline.
This expected dividend per share equates to a yield of 3.5% based on the recent share price. This is a relatively low yield for an oil and gas royalty trust, but the yield looks better when compared to the 1.3% average yield of the S&P 500 Index.
Monthly dividend paying stocks can help investors even out cash flows compared with stocks that follow the traditional quarterly payments. Monthly payments can also help investors compound income at a faster rate as well.
High yield stocks can provide investors more income, something that is important to those investors living off dividends in retirement. Permian Basin does offer a yield that is considerably higher than that of the market index and Treasury securities.
Investors with a higher appetite for risk might feel that the large dividend increases and 3.5% yield are a solid trade off for steep declines that occur when energy prices fall.
That said, Sure Dividend believes that the risk is not worth the reward when it comes to royalty trusts. Permian Basin does offer a monthly high yield, but doesn’t provide certainty of what the payment may look like. The dividend payments rely totally on the price of oil and gas. When one or both are down, so are dividend payments. Investors who need steady, reliable income are strongly encouraged to invest elsewhere.