Three Reasons Why You Should Own Canadian Income Trusts
by Tom Dyson
August 15, 2006
On the face it of it, the landscape doesn’t look good for retirement-age investors…
Stocks look expensive… real interest rates are close to zero… and great deals in real estate income are non-existent. Even dividends, the trusty income source of our grandparents, have gone out of fashion.
And the hardest part is retirement-age investors don’t have the luxury of time; they can’t just buy and hold investments for the long term.
Here at DailyWealth, we hear these concerns over and over again from our readers.
We’ve already given you some excellent income ideas in these pages – from Icelandic bonds and CDs to fast food restaurant chains with double-digit payouts.
These ideas are safe, they may pay as much as 15% in dividends or income, plus we frequently pick up a capital appreciation as other investors cotton on to our ideas.
These days, we are finding more income-producing investments are available to us, with lower commissions and greater liquidity, than ever before. Yet these investments receive so little coverage from the mainstream press.
Is it because marketers and promoters can’t get excited by a 10% interest payment anymore, or do people just not understand income investing? We’re not sure. Either way, we think it’s important to get these ideas into the market.
That’s why, later this year, Steve and I are launching a newsletter dedicated to finding great income investments. We’re calling it True Income.
In the meantime, we’re going to show you some of our favorite sources for income investments, how to buy them and what kind of returns you should expect. Today, I want to kick off this new series with an explanation of Canadian royalty trusts.
Canadian royalty trusts are one of the highest yielding investment classes in the market, sometimes offering returns above 20%. I like them for a number of reasons. I’ll get to these in a minute. First let me tell you how they work.
About twenty years ago, the Canadian government allowed local companies to set up a new kind of corporate structure, called “income trusts.” In exchange for paying just about all of their profits out to ordinary shareholders (that’s you and me), the Canadian government made these businesses exempt from federal corporation taxes.
It’s only fair if you think about it. Before this structure came into existence, shareholders got taxed twice. Once on the corporate level when government taxed business profits, and then on a personal level when the IRS assessed the dividend and income payments you received on your stock holdings.
Canadian income trusts are very much like real estate investment trusts (REITs) in the United States. The difference is, the businesses in Canada come from every industry, not just real estate. Oil and gas exploration companies… restaurants… publishing… and high-end catering services, just to name a few.
Because of the tax efficiencies and because these businesses pay almost all their profits back to shareholders, returns can be phenomenal, especially if the underlying businesses start generating lots of cash.
Aside from their high returns, there are other reasons to like these Canadian trusts. One, they trade in Canadian dollars.
The CAD is in a long-term bull market versus the U.S. dollar. Canada has one of the greatest hoards of natural resources on the planet. And unlike its US peer, the Canadian government is in solid fiscal shape. I predict Canada will be one of the ten richest countries in the world by 2020 ranked by GDP per capita. As the currency rallies, our Canadian trusts denominated in CAD will benefit.
Two, unlike bonds, where your interest payment is fixed to maturity, royalty trust payouts are linked to the performance of underlying businesses. If the business does well, the payout goes up. This protects us from inflation.
Take a bond that pays you $100 a year for the next thirty years versus a trust that pays you a slice of the profits from a coal mining business. In twenty years’ time, which do you think will be worth more?
Three, many of the Canadian trusts are in the resource business. Miners, explorers, drillers, transporters and property owners... I like the trusts as a great way to play the commodities boom.
Keep an eye out for the launch of True Income. We’ll definitely be recommending our favorite income trusts… we’re bringing income back in style.s
Good investing,
Tom
