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Fostering YOUR Wealth Newsletter
December 2009
Dear Reader,
I received many emails asking me to address income trusts - so this issue will take a quick look at these unique investments.
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Income Trusts (Booms or Busts)?
During the late 1990s while many investors were chasing hi-tech stock market darlings such as Nortel and JDS Uniphase, I was slowly buying boring, slow-growing companies.  Many of these slow-growing companies were income trusts such as Pembina Pipelines or RioCan REIT.  For almost three years I watched as countless investors made money hand over fist while I stuck to my slow-growth stategy, but this approach eventually paid off as these boring investments soared as technology stocks crashed.
Since then there have been some changes (such as tax changes introduced a few years ago making income trusts the target of increased taxation).  So are these still good investments?
There is no "correct" answer as income trusts cannot all be painted with a broad brush.  Just as there are some good stock investments and some poor ones, the same can be said of income trusts.  If you want to invest in this area, I would look for simple businesses that have good long-term prospects (the same way investors look at stocks).
With the new taxation, some trusts will be forced to cut their distributions (payments to investors) and this will cause their stock prices to plunge.  This reality adds risk for investors - but also opportunity.  There have been some pretty solid businesses that have seen their stock prices decline by over 50% after announcing distribution cuts and this price collapse creates opportunities for saavy investors.  I would argue that income trusts which cut their distributions prior to 2011 when they will be forced to pay increased taxes might prove to be fertile ground for investors looking to find some high-yielding investments - if current investors in these companies overreact and drive down the stock price.
Prudent investors might wish to create a list of some trusts they would like to buy if the prices become cheap enough.  You can find some information on-line and also in various publications such as The Money Reporter (available at most major libraries in the reference section).  This would be a starting point and you can get more information by looking at the annual reports (online in most cases).  Take a look at some of the trusts that have announced drastic distribution cuts and see how their stock prices have been punished.  Examples include Transforce (trucking), BFI (now IESI BCF - waste removal), Algonquin power (utilities).  The simple reality is that when these companies announced distribution cuts, their stock prices tanked - creating good buying points for investors who were interested.  There may be other opportunities as 2011 draws closer.
However, for many high quality trusts, the tax change has been so well-known for quite some time that they have already accounted for the extra tax so that nothing will happen once the new rules take effect.  It's also worth noting that REITs (real estate trusts) will be unaffected by the rule changes.
So it's not the end of the world for trusts - and for some investors it might just be a new beginning.
Derek Foster (Canada's Millionaire Investor)
Quick Correction
In my previous issue I mentioned that if you do not open your TFSA (Tax-Free Savings Account) before year-end, you would lose your contribution room.  This is not accurate - you will accrue contribution room whether you open your account or not.  For complete information from CRA, go to:
Income Trusts:
Income trusts are legal entities (similar in some ways to corporations) that hold "income-producing" assets.
The advantage for investors is that these investments have historically offered high yields to investors (ie. consistent cash flows).
These investments are usually mature businesses so they don't offer a lot of growth potential (investors earn higher income but give up some of the potential for large future capital gains).
You must realize that Derek Foster is not a financial planner, advisor, or a professional investor in any capacity.  As such, he is not an expert in legal, taxation, financial, or any other matter with regards to the information he may provide.  The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this information.  By signing up for this free newsletter, you agree that Derek Foster and Foster Underhill Finanical Press will not be liable for any information you might view and it is the readers' responsibility to seek out professional advice before taking any action.