Royalties are a form of future payments for something that happened in the past. They are typically paid through a third party. It's not quite "something for nothing" but it can sometimes feel that way. Your royalty checks can keep arriving long after you've done the work or made certain types of royalty-producing investments. There are a number of different ways you can generate royalty checks for yourself.
Some Background on Royalties
A royalty is a certain type of ongoing payment from a third party for the use of something you created or otherwise own. For example, if you write a book and sell it on your own, you get to keep 100 percent of the sales. If your book is published by a publishing house, however, it is the publisher that collects the sales income. Typically, the publisher then sends the author regular royalty checks.
Royalties can be an agreed-upon fixed amount, but, as Investopedia points out, they are more commonly based on a percentage of income produced. In the author-publisher example, for instance, the author may receive a percentage of total sales. Well-known authors can command a high percent, but newly published authors may only receive a small portion – five to ten percent is fairly typical – of overall sales.
Royalties can also be in perpetuity, that is, as long as sales continue, royalty checks will continue. In some cases, though, royalty agreements may lapse after a fixed length of time.
Types of Royalty Payments
As noted, authors of original works like books, plays, photographs and other written or printed works can receive royalties from their publishers. Other creative fields can also generate royalty payments, but creative production isn't always necessary, as some types of ownership can generate royalty payments as well.
Sources of royalty payments include:
- Music: Original recordings and song-writing are also typically marketed through third parties such as recording companies who benefit from the sales of the music and provide ongoing royalties to the artists.
- Software: Individuals or firms that create an in-demand software product can then license the software and receive regular royalty checks based on the extent to which the software is used.
- Patents: Patented inventions can also be licensed. Inventions that find widespread use in multiple products can produce millions in royalties for the original patent-holder.
- Mineral rights: If a petroleum company drills for oil on privately owned land, the landowner is entitled to royalty payments based on the amount of oil produced and the value of the product. The same holds true for other mineral and mining operations, such as natural gas, coal or metal ores.
- Franchises: Business owners of a McDonalds, a 7-Eleven or other popular franchises pay a portion of their sales to the corporate headquarters for the right to license their operations. This is a form of royalty payment, though it reverses the typical direction, as the funds flow from the small entity to the larger, rather than vice-versa.
- Rents: Monthly rent checks are a form of royalty payments from a tenant to the landlord. Unlike most other types of royalties, the monthly amounts are fixed for a period rather than based on sales activities.
Royalties vs Residuals
Some creative types receive payments known as residuals. These are similar in most respects to royalties. However, as noted by the EMD Group, the term residuals is generally used for those who make a contribution to a creative output without being considered the actual creator themselves.
For example, a violinist who plays for a symphony orchestra is generally entitled to receive residual payments for any income generated by sales of the orchestra's recordings. The violinist is not the author of the work, per se, but his or her contribution to the final work is rewarded through residual payments.
Similarly, actors in a soap opera receive payments typically labelled residuals rather than royalties.
Dividends as Perpetual Income
Though not generally thought of as royalty income, stocks that pay dividends are another time-honored and convenient way to generate periodic income. Dividend-paying companies offer a portion of earnings to shareholders on a regular basis, usually by crediting their accounts with a quarterly dividend check.
Dividends are typically paid as a single-digit percent of the stock's share price. IBM, for example, pays an annual dividend of about five percent.
David Sarokin is a well-known Internet specialist with publications in a wide variety of business topics, from the best uses of information technology to the steps for incorporating your business. He is the author of The Corporation, Its History and Future (Cambridge Scholars, 2020) on the role of big business in the modern world, and Missed Information (MIT Press, 2016), detailing how our social systems like health care, finance and government can be improved with better quality information.