John Reese selects stocks based on a detailed historical analysis of the strategies of many of the s...
Join Gordon Pape LIVE at The MoneyShow Toronto!
Join Gordon Pape LIVE at The MoneyShow Toronto!
Keep Your Eye on These Asset Classes
11/10/2011 9:50 am EST
Income expert Gordon Pape discusses in this exclusive interview with MoneyShow.com three different asset classes that he feels offer the most favorable and relatively safe returns in the turbulent year ahead.
Gordon, in the last segment we touched on two of your favorite themes, which are gold and dividend paying stocks, and now we are looking at limited partnerships, income trusts, and bonds.
So could you talk to us a little bit about each of those?
OK. First of all, I think a lot of our viewers are familiar with the fact that Canada used to be a wonderful place to invest in these income trusts, which are very high yielding securities and wonderful things.
Then the Government of Canada Finance Minister, Jim Flaherty, said, "Well, these have gotten too good, and so we are going to put a new tax on them…" which effectively killed off the marketplace.
That was a traumatic moment for quite a lot of people.
It certainly was. That was on Halloween night in 2006 and the new tax came into effect this year. There was a long delay for people to become accustomed to this happening.
So anyway, the tax is now in place. So most people think they are gone, and they have been killed. Well, in fact, they haven’t. There are still a few of them left around.
So they come back kind of like ghosts and ghouls for this Halloween in another format.
Well, they never went away, actually. What happened was that most of them converted to conventional corporations—but a few of them, the managers looked at the situation and they said, "It doesn’t do us any good to convert. We would rather just pay the taxes…we think that is better for our shareholders. We are going to pay taxes as corporations anyway, so let’s just pay this new tax and we are just going to carry on."
So, one of them, for example, is Inter Pipeline (Toronto: IPL.UN). It is an income trust…actually, it is a limited partnership. Actually, even though it is now subject to tax, it actually raised its distribution at the end of last year. So it is paying a higher distribution in 2011 than it did in 2010.
It is in the business of natural gas transmission, collection, storage, and so on. It is a very stable business based in Calgary. It is a very solid company. Very few people even know it exists and it yields about 6%. A very, very solid company.
So on the subject of yields, let’s move on to talk about bonds. What kind of bonds do you like now? I mean, a lot of people are nervous about bonds. They don’t like Treasuries…rates are too low. Junk bonds are really scary. Where are you finding value in the bond market?
Well, in the Canadian bond market. The Canadian bond market has yields which are significantly higher than the US bond market.
Now by significantly higher, I am talking about basis points. I am talking about 0.5%, 0.75%—75 basis points—but in terms of the low yields that we have today, those are pretty big spreads over which you’re getting incomparable maturities in the other states.
Are you talking about the Canadian Treasuries, basically, or what kind of market?
Canadian Treasuries…the corporate bonds as well if you can get them. There are some ETFs, which are easier to buy obviously than the corporate bonds.
But the thing about bonds is this: so far in 2011, as we speak, the Canadian stock market is off 6% and the Canadian bond market is up about 6.5%. I mean, it is just a huge spread, and is something that nobody could have ever predicted in the start of 2011, as it just wasn’t in the cards. It has all happened because of what is happening in the economy.
So now we have got bonds at very low prices, so there is not going to be anything like that kind of return in 2012, and so we are looking forward. I don’t want people to think that I’m saying they are going to get 6% to 6.5% off Canadian bonds—they are not.
They are going to get, probably, a better return than they are going to get off of US bonds, a comparable US bond. They are going to get the stability of the currency value, the underlying currency value, and perhaps some value appreciation on that for US investors, and they are going to get a good defensive position in their portfolio that is going to help to cushion their portfolio against possible future stock-market shocks.
OK, sounds good, can you name one that people should look at in particular?
Well in this case it is very hard to mention a bond. I would suggest you look at a fund, an ETF. It is the iShares DEX Universe Bond Fund (XBB), so government and corporate bonds.
Do you own either Inter Pipeline or XBB?
Yes, I own shares in both.
Related Articles on INCOME
Periodic bouts of red ink, or larger declines like 10% corrections and even 20% bear markets, are a ...
For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
Johnson Matthey (JMPLY), the 200-yr old U.K. refiner of gold and platinum metal catalysts which are ...