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The Best Ways to Invest in Royalties in 2023

The Best Ways to Invest in Royalties

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When we think of investments, real estate, stocks, and bonds tend to come to mind first. When you’re hoping to diversify your portfolio, however, investing in royalties can be a profitable solution.

Investing in royalties may provide long-term returns, depending on the type you choose. Royalty rights offer steady passive income that is usually protected from equity and bond fluctuations. Whether you purchase shares of royalty trusts or bid on royalty auction exchanges, royalty investing is a great, alternative way to generate a passive income stream for years to come.

Here’s how to get started investing in royalty income.

What is royalty investing?

Royalties often come from intellectual property, like movies and music, but they’re not limited to that category. A royalty is a payment received by the owner of the asset, in exchange for the use of the asset. For example, traditional publishing companies purchase the use of an asset (a manuscript) to publish, then pay a percentage of books sold as royalties.

Patents, trademarks, oil, gas, and mineral mining leases and other assets can generate royalties, too. The income is considered passive income by the IRS, so it is taxed at capital gains rates. These are typically lower than tax rates for wages and salaries.

As long as the asset is generating income, it should receive royalties. Certain types of royalty income are steadier than others. For example, royalty rights to popular classic films are more likely to generate income than those for an art-house indie flick.

8 types of royalty income

  • Music: Every time a song is publicly performed, downloaded, streamed, played on the radio, used in film or TV, or sold in physical form, the composer receives royalties.
  • Mineral resources: If a parcel of land includes minerals or metals, like gold or silver, the landowner is paid royalties for anything removed through mining.
  • Inventions: Inventors can license the use of their patents to product makers and receive royalty payments.
  • Oil and gas: When a parcel of land includes the rights to oil and gas on the property, the owners can receive royalties for the resources extracted from the land.
  • Movies and TV: The writers, actors, directors, producers, and others who hold a film or TV show’s copyright will receive royalties (also known as residuals) whenever the show is sold in physical form, streamed, played, or broadcast.
  • Books: Book publishers pay authors, illustrators, and other copyright holders royalties, which are typically a percentage of the sale price of a book, e-book, or audiobook.
  • Trademarks: Trademark owners receive royalties whenever other parties license the use of that trademark.
  • Businesses: Investors who fund businesses may request royalties on the revenue from any products or services sold.

Two ways to invest in royalties

There are two main ways to invest in royalties: royalty trusts and royalty auction sites.

Royalty trust investing

Royalty trusts have the potential to deliver higher yields than stocks, although there are no guarantees. To invest in a royalty trust, you purchase shares in a publicly traded corporation who has acquired ownership of rights. The income generated from those royalties is then distributed to shareholders through dividends.

The main benefit to royalty trusts—at least those that distribute 90% or more of their income to shareholders—is that they are not subject to double taxation like most corporations. Investors are simply taxed at personal rates on their share of the dividends. In some cases, you may even be eligible for tax credits if your shares are in clean and renewable energy.

The companies that own the royalty trusts usually aren’t the ones creating intellectual property, or mining or drilling—other companies or individuals handle that part of the process. That makes it an easy way for investors to purchase shares without having to own or create the actual properties.

However, there are risks associated with royalty trusts, especially for oil, gas and mineral leases. These cash flows are subject to volatile commodities prices and unpredictable production levels, which means that the income isn’t necessarily steady. Because the trusts are typically not run by the creators or mining companies themselves, there’s no real control over what is produced and when.

As long as you go into the investment fully aware of the risks versus potential rewards, investing in royalty trusts can be profitable. The tax burden is typically lower than other kinds of corporate investments, and the right investment can generate a steady stream of income—but that’s never guaranteed.

Royalty auction investing

Royalty auctions also provide royalty investment opportunities. Many sites offer online auctions for royalty investing, including music, film, television, books, minerals, gas and oil, business shares, and more.

Royalty auction investing allows investors to buy fractional shares of a property, rather than outright purchasing the rights to an asset. For example, purchasing the rights to a band’s entire catalog of music is cost prohibitive to most people—but purchasing a fractional share of those rights and receiving proportionate royalty income may be possible.

The risks to royalty auction investing are similar to purchasing shares in royalty trusts. There’s no guarantee that the income will be steady, although obviously, the more established the asset the more likely you’ll see regular royalties.

For intellectual property assets like music, film, and books, there’s always the chance that the property will suddenly experience popularity. For example, sometimes when songs are featured in popular TV or movies, they generate more income due to increased sales, streaming, and general interest.

Get started invested in royalties

Ultimately, investing in royalties can be an easy and potentially lucrative way to generate passive income. As long as you’re aware of the associated risks, you can find plenty of investment opportunities to help diversify your portfolio.

Whenever you’re considering investing in royalties, it’s wise to talk to a financial advisor. Getting individual advice based on your specific portfolio, income, and investment goals will ensure that you make appropriate decisions. With expert guidance and a few judicious investments, you can generate passive income that isn’t subject to the same market forces as more traditional investments.