I’ve long liked royalty companies as income options for equity investors seeking safe and stable dividend income. While most such companies I’ve looked at in the past are in the precious metals mining space, PrairieSky (TSX:PSK.TO) provides royalties to energy companies.
The energy sector is one which is inherently risky, particularly today given the extreme volatility we’ve seen in energy prices. This makes any sort of equity or debt investing in this sector tricky for investors to assess in terms of risk/reward. That said, for those who are bullish on a long-term recovery in commodities, a company like PrairieSky provides excellent exposure to this sector.
Royalties are really the preferred way to invest in this space in my view, as royalty payments will continue to be made as long as oil continues to be produced. Risks related to insolvency and/or production volume declines are material, but are largely priced into the depressed stock prices of companies like PrairieSky, in my view.
As with any highly volatile stock, investing with a long-term perspective is certainly required to smooth out returns which are likely to be lumpy over the next few years.
For those looking to trade companies like PrairieSky, I’d recommend implementing stop losses or using options to hedge portfolio positions.
Keeping allocations small is another way to limit exposure to companies in the energy sector or any other highly volatile space as well. For now, I’m keeping PrairieSky on my watch list as a potential trade, should market conditions warrant an investment in this company, or the energy sector more broadly, in the future.
Invest wisely, my friends.
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