The royal way to add monthly income to your portfolio

What might Prince’s music, drug patents and the semiconductor chips in your phone have in common? As it turns out, they all earn an income long after they’re first released to the world.

And we’re not talking small change either. Spotify claims that last year, it paid out more than US$10 billion to artists, rightsholders and publishers alone¹. Meanwhile, the global mining industry advocacy body, ICMM, says its member corporations paid out US$13.4 billion in 2024².

Indeed, royalties are the quiet financial engine powering some of the world’s most profitable enterprises. This piece will explain how they work, why they could be suitable for you and how you can access them through an ETF.

What are royalties?

Royalties are payments to the owner of an asset for the right to use it. These payments are usually a percentage of revenue earned from the asset or a fixed fee per unit sold.

For investors, they represent an alternative way to invest in a business without having to directly invest in it. In other words, you gain exposure to the revenue and growth potential of a company or sector using the asset, without also having exposure to their costs or many operational risks.

What kinds of companies earn royalties?

Given royalties generate a payment stream for the use of either a physical asset or a piece of patented intellectual property, many industries have companies that can earn royalties.

Miners, energy producers, pharmaceutical firms, music producers and technology companies all have the potential to make royalty income of some form.

For instance, Canadian company Franco-Nevada Corporation is one of the world’s largest mining royalty companies. Spun out of Newmont Mining in 2007³, its portfolio consists of over 400 assets⁴ and owns gold, silver and platinum mines as well as oil and gas reserves throughout the world. The combination of reliable royalty income and the surge in gold prices created a perfect storm for Franco-Nevada in the first quarter of 2025. Revenues increased 43% year on year while its adjusted EBITDA margins clocked in at 87%⁵.

Another is ARM Holdings. The semiconductor and software design company earns royalties on its chip design IP, including 1-2% of every iPhone sold around the world. In addition, it makes US$1.2 billion in licencing revenues and royalty sales alone⁶. Even in a down market, this royalty model helps ensure the company remains highly profitable.

Why should investors consider royalties?

Royalty-focused businesses share three main characteristics:

• Very high average gross margins
• High average return on capital
• Recurring revenues – some of which is paid back to shareholders in dividends

In this first table, you can see how the gross margins of companies in the Solactive Global Royalties Index stack up against the broader market.

In all cases, the gross margins of royalty-generating companies far outpace the broader index. And as of May 2025, royalty-generating companies generate more than double the gross margins of the broader corporate landscape.

Average gross margins of Solactive Global Royalties Index versus MSCI World Index

Source: Bloomberg. Past performance is not an indicator of future performance. Gross margin figures are calculated based on the companies in the Solactive Global Royalties Index (the index which ROYL aims to track). You cannot invest directly in an Index. ROYL’s inception date was 9 September 2022.

The average return on capital of royalty-generating companies is also generally very strong:

Average return on capital of Solactive Global Royalties Index versus MSCI World Index

Source: Bloomberg. Past performance is not an indicator of future performance. Gross margin figures are calculated based on the companies in the Solactive Global Royalties Index (the index which ROYL aims to track). You cannot invest directly in an Index. ROYL’s inception date was 9 September 2022.

Many leading royalty businesses also pay dividends because of the recurring income their royalties generate. For instance, Australian-listed Deterra Royalties (ASX: DRR) (which owns and operates iron ore and gold mines) has a current dividend yield of 6.33% (as of 15 May 2025).

This figure is significantly higher than the dividend yield of the All Ordinaries (3.47% as of April 2025). Other companies pay an even higher dividend yield. For instance, Canadian iron ore royalty firm Labrador Iron Ore Royalty has a 10.94% dividend yield (as of 15 May 2025).

ROYL: The income play with a growth foundation

Royalty companies can be growth-oriented, given the high return on capital that can be achieved with royalty ownership. Many of these companies also use their retained earnings to reinvest and acquire more royalties. However, the distribution frequency of the ROYL Global Royalties ETF recently changed to pay out distributions monthly. So why is this?

It’s because royalty companies can generate attractive and regular cash flows from their operations. This change to ROYL seeks to allow investors to experience similarly attractive levels of cash flows as those companies in the form of an ETF.

The commencement of monthly distributions aims to reflect the historical cash flow yield of the underlying portfolio. As of 31 December 2024, that yield was 6.5%.

Key risks investors should consider

Investing in royalties come with their own unique risks that investors should consider:

• Revenue volatility: If the underlying asset sees a decline in demand, the price they can charge for use of that royalty may be affected.
• Legal risks: Rights can be disputed, revoked or expire.
• Cash flow risk: Any combination of these events could see operating cash flows reduced by an individual corporation.

Start earning a royal return

With the potential to offer solid returns and distributions, ROYL can be used to complement your ‘core’ equities exposures as a solid, long-term satellite play.

For income investors, they can also serve as a unique monthly source of distributions. ROYL aims to pay out distributions based on the income the portfolio has historically earned – in this case, around 6.5% p.a.

For more information, please reach out or visit ROYL’s fund page here.

Sources:

1. https://newsroom.spotify.com/2025-04-15/indian-artists-are-reaching-more-global-fans-than-ever-before-and-the-data-proves-it/ ↑

2. https://www.icmm.com/en-gb/news/2025/tax-and-royalty-payments-2024 ↑

3. https://www.reuters.com/article/business/newmont-sells-royalty-non-core-assets-for-13-billion-idUSWEN2744/ ↑

4. https://www.franco-nevada.com/our-assets/portfolio-overview/default.aspx ↑

5. https://s201.q4cdn.com/345177888/files/doc_financials/2025/q1/Franco-Nevada-Reports-Record-Q1-2025-Results-vFinal-2025-05-08.pdf ↑

6. https://www.bloomberg.com/news/articles/2025-05-07/arm-provides-tepid-forecast-adding-to-caution-from-chipmakers ↑