Oh, Canada!

02/13/2004 12:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape is a noted author, the editor of five newsletters, including the Income Investor, and a leading expert in Canadian investing. One of his workshops at The World Money Show focused on Canadian income trusts. Here he explains this market, and offers some top picks.

"Those of you who live in the US may not be familiar with these income alternatives, but they are readily available.  Income trusts are similar to real estate investment rusts, but have some unique characteristics. First, these are structured as a trust, not a corporation. As a trust, under Canadian law, it must pay out its profits to shareholders at least once a year. Most pay monthly. The payments are not guaranteed, so if a trust runs into financial problems it may reduce or even suspend the distributions. In general, income trusts offer little growth potential, as the income is paid out and not reinvested in the business. And the risk levels in these trusts can vary tremendously, and indeed, some are pure junk. (We strongly suggest that US investors check with their own advisors regarding tax consequences.) Here are some specific income trusts to consider:

"Firm Capital Mortgage Investment Trust (CA:FC.UN Toronto) is involved in multi-family, residential first mortgages, non-conventional mortgages, and bridge financing. It has a very low default ratio. One warning, however is that this is thinly traded, so place limit orders. Pengrowth Energy Trust (PGH NYSE) is one of the old income trusts in Canada. It operates out of Calgary, and has a first-rate track record in the oil and gas field. Peyto Energy Trust (CA:PEY.UN Toronto) was converted to a trust from a corporation in the middle of 2003, so it has a very short track record. It is a rare trust in that only half of its cash flow is distributed, and the rest is used for natural gas exploration and development, so it has strong growth potential in addition to its income potential.

"One trust that is completely different is Yellow Pages Income Fund (CA:YLO.UN Toronto), which holds a majority position in Bell Canada’s Yellow Pages. It is the biggest income trust on the Toronto exchange. Its advantages are stability of income and a virtual monopoly in Ontario and Quebec. North West Company Fund (CA:NWF.UN Toronto) is the modern descendant of the old North West company that was built on the fur trade. Today, it operates general stores across the Canadian Arctic and in Alaska. It’s a dull business with low growth, but it is also very steady and almost recession-proof.

"Royal LePage (CA:RSF.UN Toronto) is in the business of supplying services to real estate brokers, which is a solid, core business. The main risk here would be a slowdown in retail housing sales, which would have a negative impact on the volume and on the number of active agents. Finally, Fording Canadian Coal Trust (FDG NYSE) is in the coal mining business. It is huge; this trust has swallowed up most of the competition in Western Canada. The risk is on the high side because cash flow is influenced by the rise and fall of coal prices."

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