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As inflation has surged to a 40-year high this year, income-oriented investors are struggling to protect the real value of their portfolios from declining. High-yield monthly dividend stocks are great candidates for the portfolios of these investors. They offer exceptionally high yields while they also pay their dividends on a monthly basis, thus allowing the income stream to compound at a faster pace. However, these stocks usually carry an elevated amount of risk and hence investors should perform their due diligence carefully before purchasing them. In this article, we will discuss the prospects of three high-yield monthly dividend stocks, namely PermRock Royalty Trust (PRT), Sabine Royalty Trust (SBR) and Cross Timber Royalty Trust (CRT).

PermRock Royalty Trust

PermRock Royalty Trust is a trust formed in late 2017 by Boaz Energy, a company that is focused on the acquisition, development and operation of oil and natural gas properties in the Permian Basin. The trust generates all its cash flows from the sale of oil and natural gas produced from these properties.

The Permian Basin is the most prolific oil producing area in the U.S. The properties of PermRock consist of long-life reserves in mature, conventional oil fields, with shallow, predictable decline rates. The trust can pump additional oil via water-flooding techniques, while it will also identify new reserves in the area in the upcoming years. As a result, PermRock believes that it can produce oil for at least 75 years.

In 2021, PermRock saw its oil and gas production decrease 16% and 12%, respectively, over the prior year. However, its average realized price of oil grew 48% and its average realized price of gas nearly tripled thanks to the strong recovery of the energy market from the pandemic. As a result, the trust nearly quadrupled its distribution per unit, from $0.16 in 2020 to $0.61 in 2021.

Even better, the price of oil has rallied to a 13-year high this year due to the invasion of Russia in Ukraine and the resultant sanctions of western countries on Russia. The latter produces approximately 10 million barrels of oil per day and exports 5 million barrels per day (~5% of global supply).

In addition, the price of natural gas has rallied to a 13-year high this year in a similar fashion. Europe, which generates 31% of its electricity from natural gas provided by Russia, is currently ramping up its efforts on diversifying away from Russia. As a result, numerous LNG cargos have been directed from the U.S. to Europe. This development has rendered the U.S. natural gas market extremely tight and hence the price of U.S. natural gas has rallied to a 13-year high lately.

PermRock is thriving thanks to the 13-year high commodity prices prevailing right now. In the first three months of the year, the trust has offered distributions per unit of $0.21. These distributions correspond to an annualized yield of 9.3%, which is certainly outstanding, at least on the surface.

However, the natural decline of the fields of PermRock in the long run is a strong headwind, which should not be undermined. Moreover, the price of oil is highly cyclical. U.S. oil producers are ramping up their output at a fast pace thanks to the favorable environment and total supply will outpace demand at some point in the future. When that happens, the price of oil will enter its next downcycle, which will cause excessive downside risk to PermRock, as the trust is extremely sensitive to the gyrations of the price of oil. Overall, PermRock is offering an exceptionally high yield and is thriving right now, but investors should be aware of its extreme sensitivity to the cycles of the oil price.

Sabine Royalty Trust

Sabine Royalty Trust is an oil and gas trust set up in 1983 by Sabine Corporation. At initiation, the trust had an expected reserve life of 9-10 years but it has exceeded the initial expectations by an impressive margin. The current estimated life of the trust is 8-10 years. Sabine Royalty Trust receives royalty and mineral interests in producing properties and proved oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. It generates approximately 2/3 of its revenues from oil and 1/3 of its revenues from gas. Its assets are static, i.e., no further properties can be added.

In 2021, Sabine Royalty Trust greatly benefited from the recovery of the energy market from the pandemic. Its production of oil dipped 10% over the prior year but its gas production grew 25%. In addition, its average realized prices of oil and gas grew 39% and 88%, respectively. As a result, its distribution per unit grew 74%, from $2.28 in 2020 to $3.97 in 2021. Moreover, thanks to the aforementioned rally of the prices of oil and gas to multi-year highs, Sabine Royalty Trust is likely to offer a 10-year high distribution per unit this year. Based on its total distributions per unit of $2.45 in the first four months of this year, the stock is offering an annualized yield of 11.3%.

Sabine Royalty Trust is one of the highest-quality oil and gas royalty trusts, as it has exhibited impressive performance. It had an initial expected life of 9-10 years but it has continued producing oil and gas for 39 years, with a current expected lifetime of another 8-10 years. It has also offered an average distribution yield of 7.9% over the last decade. It is also remarkable that the proved developed reserves of oil and gas of the trust have grown 4% and 16%, respectively, since the end of 2017.

On the other hand, due to the nature of its business, Sabine Royalty Trust is highly sensitive to the cycles of the prices of oil and gas. The stock has doubled in the last 12 months, to a new 10-year high, thanks to the ideal environment formed by the 13-year high prices of oil and gas. However, whenever the next downturn of the energy market shows up, the stock will have excessive downside risk.

Cross Timbers Royalty Trust

Cross Timbers Royalty Trust is an oil and gas trust set up in 1991 by XTO Energy. It produces approximately equal quantities of oil and gas and it is a combination trust: unit holders have a 90% net profit interest in producing properties in Texas, Oklahoma, and New Mexico; and a 75% net profit interest in working interest properties in Texas and Oklahoma. A working interest property is one where the unit holder shares in production expense and development cost. In other words, if development costs exceed profits, distributions are suspended.

In 2021, Cross Timbers Royalty Trust saw its production of oil and gas plunge 54% and 24%, respectively, over the prior year, primarily due to the natural decline of its fields. However, its average realized prices of oil and gas grew 57% and 132%, respectively, and thus its distribution per unit grew 43%, from $0.77 to $1.10.

The trust will greatly benefit from the multi-year high prices of oil and gas prevailing right now. Based on its distributions per unit of $0.28 in the first three months of the year, the stock is offering an annualized yield of 8.1%.

On the other hand, the steep decline of its output last year is a stern reminder of the risk of the trust. Cross Timbers Royalty Trust has repeatedly stated that it expects its output to decline by 6%-8% per year on average in the long run due to the natural decline of its fields. As it cannot add new properties in its asset portfolio, the decline of its fields is a strong headwind for its future prospects. Overall, Cross Timbers Royalty Trust is a high-risk trust, particularly now that it is trading close to its 5-year highs.

Final Thoughts

The above three stocks offer exceptionally high yields and pay their distributions on a monthly basis. As a result, they are attractive candidates for the portfolios of income-oriented investors. However, they are extremely sensitive to the cycles of the prices of oil and gas and hence they carry excessive risk. Experience has proved that it is best to invest in these three stocks during periods of depressed commodity prices. This is not the case right now, as the prices of oil and gas have rallied to multi-year highs lately.