Diversify Your Portfolio By Owning Music Royalties

Before I retired, I worked for years inside grocery stores, both as a store employee and as a vendor who visited multiple stores.

And let me tell you. Christmas was the worst time of year. 

The week leading up to Christmas was always the worst. It was a constant battle to make sure we had enough inventory, and that this inventory was merchandised properly. It was always cold outside, which brought its own set of challenges. And the overall pressure of the season left your co-workers stressed out.

But, for me, the worst part was the Christmas music. I hated Christmas music so much that even to this day it’s not allowed to be played inside my house. Christmas music is eight songs played over and over again about nonsense like an imaginary snowman who somehow has an adventure without legs and a freak reindeer with a fog lamp for a nose.

We’d have to listen to it for about a month and a half because it’s proven to make people spend more over the holidays. Or at least that’s what we were told, anyway. So you’d start it early, in the hopes you could get people into the holiday spirit in November.

It was pure torture, and I’m still traumatized to this day over it.

Okay, not really. I’m just complaining.

One thing I did think about when listening to Jingle Bells for the 90th time is how lucrative owning the right music royalties would be. It’s the perfect passive business; you just sit back, relax, and let the cheques roll in.

Turns out it’s not quite that simple, but the concept is interesting enough. Let’s take a closer look at how even regular ol’ retail investors can hook themselves up with music royalty dividends.

The power of music

A quick story of how powerful Christmas music can be as an investment.

In 1994, after yet another smash album success, Mariah Carey’s then-husband (who was the head of her record label) tried to convince her to do a Christmas album.

Carey was not having it. She believed that a Christmas album wasn’t for artists at the peak of their fame, like she was. It was for yesterday’s stars who were eager for one last shot of fame before hanging up the proverbial skates.

After some back and forth, Mariah reluctantly headed into the recording studio. The album consisted mostly of cover songs of old classics, but she and her writing partner Walter Afanasieff did come up with one original song. After less than an hour of back and forth, All I Want for Christmas Is You was born.

The album came out in late 1994, and the rest is history. The single was a massive hit and even to this day generates succulent royalties for Carey. Estimates vary, but most agree that she earns somewhere between $2M and $4M annually, just from that one song.

That’s the power of owning music royalties. There are few other small investments that can turn into something that generates a lifetime of dividends.

The indirect way to own music royalties

The ridiculously simple way to own a basket of music royalties is to buy shares of Universal Music Group (NYSE:UMG).

Together, the company owns the rights to approximately 3M recordings from 220 artists and bands, across approximately 50 record labels. Collectively, it combines to the finest library in the world of music.

Take a look at just a small sample of Universal’s catalog:

The beauty of an investment in Universal is it isn’t just about the music royalties. The company works with each of their artists on everything from merch to concerts to creating more unique products for the 5% of each artist’s fans who will buy anything. Like Elton John’s sock collection, which I assure you is a real thing.

However, there are a few issues with owning music royalties in this way. Universal Music Group only trades on the OTC exchange in North America; the stock’s primary listing is in the Netherlands (although that primary listing is scheduled to move to the U.S. in 2025). It also only pays a 2.2% dividend and trades at a somewhat lofty valuation of approximately 25x forward earnings.

Still, you can’t beat owning such a vast array of famous songs. And with streaming becoming more and more popular, earnings from these songs should continue growing.

That’s what Bill Ackman thinks, anyway. He’s a large Universal shareholder through his hedge fund, Pershing Square.

The direct, active way

There’s a way for regular investors to directly own music royalties by investing directly into them using the Royalty Exchange website.

The site has dozens of auction-style listings of music royalties from a wide variety of artists. Some are household names, but most are from more niche artists. Many of these royalty assets only generate a few thousand dollars a year in earnings, meaning there are many investors who simply aren’t interested. They’re too small, too niche.

This creates a situation where a savvy retail investor can generate high returns on their capital.

Unfortunately, this active investment in music royalties comes with a bunch of problems. Most royalties have myriad of conditions in the fine print that can quickly turn what looks like a lucrative investment into a dud. It’s also really hard to predict what songs will stay popular, which directly impacts earnings.

I’ll also point out that investing directly in royalties can be a bit of an issue come tax time. My five minutes of Googling on the subject was inconclusive, but there’s certainly the chance royalty income is subject to GST/HST, and it looks like it’s taxed at your regular tax rate.

The direct inactive way

Canadian Dividend Investing is known for discovering kind of obscure, off the beaten path dividend stocks.

I’ve written about little-known stocks like Algoma Central (TSX:ALC), a Great Lakes shipper with an interesting moat, and First National (TSX:FN), a mortgage lender that gets zero attention because it competes with Canada’s largest banks.

Today I’m going to talk about another odd one, a company that makes both Algoma Central and First National look downright normal.

The company is Mills Music Trust (OTC:MMTR.S), a company that owns copyrights to 12,000 music titles. Approximately 1,430 produced any royalty income in 2023.

Mills Music Trust is endlessly fascinating, and we’ll get into some of the details in a minute. But first, I wanted to highlight the largest shareholder of Mills Music Trust, MPL Communications Inc. It owns just under 80,000 shares, or about 29% of the shares outstanding.

(This goes to show how small the company is; that 29% stake is worth about $3M, putting the whole company’s worth at about $10M. It’s probably the tiniest company I’ll ever write about.)

The interesting thing about the largest shareholder is MPL stands for McCartney Productions Limited, and it was started in 1969 as an umbrella company for Paul McCartney.

That’s right kids. You too can invest alongside Paul McCartney and own song royalties. 

The portfolio

Mills Music Trust has been around for a long time. It was originally created way back in 1964, and, as far as I can tell, it hasn’t acquired any royalties since then. It simply milks the existing assets, pays a trustee to manage the financial side of things, and issues generous dividends paid from the profits.

One reason why I waited until around Christmas to write about Mills Music Trust is much of the portfolio is Christmas music. The top two songs — which account for about 40% of revenue — are Christmas classics, songs that join Mariah Carey on rotation in every mall, grocery store, and elevator in North America for two months of the year.

Here’s a look at the top 15 songs, including the original recording date, date the recording enters the public domain, and gross revenue from each song. Note how sharply it drops off after the top 5:

We’ll notice that song 3, 14, and 15 are either in the public domain or will be there soon. This is a problem, obviously, but one nice thing about owning so many songs is one will unexpectedly show up somewhere and race up the list.

For instance, in 2020, a song called Minnie The Moocher — originally recorded in 1931 — shot up the Mills Music charts, becoming the 7th ranked song and generating about $89,000 in revenue for the trust. It’s since fallen to around 20th place in subsequent years.

As mentioned, the Mills Music Trust isn’t too interested in growth. It simply milks its current assets and pays the proceeds back to shareholders in the form of generous dividends.

Just how generous are those dividends? Take a look at recent history. Since 2019, Mills Music Trust has paid the following dividends back to shareholders:

• 2019: $6.50

• 2020: $2.84

• 2021: $2.99

• 2022: $2.88

• 2023: $3.11

• 2024: $2.37 (through nine months)

The stock trades at right around $38/share today, and has paid approximately $19/share in dividends in the last six years. It’s a yield right around 8%.

The bottom line

One of the fun things about being an investor is you get to own a piece of your favourite businesses.

Back when I worked, I used to remind my co-workers every Friday that A&W — my company — was an excellent lunch choice. And when I did convince them to go, I made sure to thank them for my dividends.

Owning music royalties is just like that, but it’s even more personal. An investment in Universal lets you support many of your favourite artists. Or, if you’re feeling a little frisky, you could (indirectly) support Paul McCartney with an investment in Mills Music Trust.

Mills Music Trust has the added benefit of owning your own piece of Christmas music, which is some of the most lucrative music out there. Plus, guys like me deserve it after having to listen to all that God-awful holiday muzak over the years.

One more thing

If you found our shallow dive into the music royalties business interesting, then I think you’ll really like the Canadian Dividend Investing premium newsletter.

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