Band's "Trusty" Canadian Yields

02/10/2006 12:00 am EST


Richard Band

Editor, Profitable Investing

"Retirees often don’t care to wait several years for capital gains to add up," notes Richard Band. "If you’re in that group, consider the high-yielding Canadian royalty trusts." Here, the editor of Profitable Investing looks north of the border for high powered yields.

"Unlike their US cousins, which gradually deplete a more or less fixed body of hydrocarbons, the Canadian energy income trusts are constantly acquiring new properties. Thus, our northern neighbors are doing their best to replenish their assets—sometimes at bargain prices (for example, when a major oil or natural gas producer decides to get rid of a field that may be too small to bother with).

"Dozens of energy trusts trade on the Toronto Stock Exchange, with a handful dual-listed on the NYSE. However, trusts differ widely in quality. As a rule of thumb, you should avoid those with the highest yields (over 12%, say, at current prices). Typically, the highest yielders are sitting on short-lived assets. Only gamblers (or the ignorant) prefer wells that will soon run dry.

"Many of the trusts with eye-popping yields are also carrying more debt than I'm comfortable with. I’m not expecting a sharp drop in energy prices, but if the unexpected should happen, I want my trusts to weather the storm. Here are three names you can accumulate on a pullback. All feature long reserve lives, moderate payout ratios (plenty of cash plowed back into the business for growth) and low debt.

"Those seeking high yields should buy ARC EnergyTrust (AETUF Other OTC) at $20.50 or less; Enerplus Resources (ERF NYSE) at $47.90 or less; and Vermilion Energy Trust (VETMF Other OTC) at $21.80 or less. Enerplus is the only one of the trio with a Big Board listing. If you purchase either AETUF or VETMF, you’ll have to buy the stock in the OTC Pink Sheets. For the other two, which trade on the Pink Sheets, always use a limit order, buying or selling. A limit order specifies the price you’re willing to accept.

"Note that my suggested buy price implies a yield of 10% for ARC Energy and 9% for Enerplus Resources. I’ve set a target yield of only 8% for Vermilion Energy, because Vermilion is retaining a larger percentage of its cash flow in an effort to grow the trust’s reserve base more rapidly."

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