The Loonie Bin: Can You Trust Income Trusts?

The Loonie Bin: Can You Trust Income Trusts?

Can You Trust Income Trusts?

I see them there, staring back at me with their juicy dividend payments. Some pay a hearty 6%, while others pay in the incredible 12% range. More yield then you can shake a stick at. The banks can take their pathetic 1% interest rates and shove it …. in someone else’s face. It sounds to good to be true but they are indeed proven to payout those amazing dividend yields.

But like all dividend payments from income trusts and common shares, they are never fully guaranteed. They can be cut or even eliminated at any moment and the share price will be reduced at an alarming rate along with it. Income trust’s dividends don’t seem very stable at all. They fluctuate more then a dividend paying common stock. If it’s a slow quarter or year, the dividend will be most likely cut. And thanks to new Canadian laws that were ousted in the U.S and Australia, the Government has their fat claws ready to take advantage of the new taxation on income trusts in 2011. I’ll make this simple and a less painful explanation. The new tax rules will force income trusts to form a corporation and greatly hinder the ability to maintain their current dividend because of the increased taxes that used to be paid by the dividend earners. So now Steve Harper and the other oxygen converters can buy the $100 bottles of orange juice AND eat the $30 beer nuts in the fridges of their hotel room and not feel as bad about it. The conservatives might even feel bad they lied to us about not taxing income funds in their election promise, but I highly doubt it

Some trusts have already converted, but I’m still skeptical of the dividends and how long they will be maintained. I will be watching income trusts and their plans on converting to corporations well into 2011 and will be weighing my options. I might miss out on some nice yields, but I’d rather take the time and invest in something rock solid once, rather then buying and selling like a mad man investing in non paying dividend stocks.

Do any of my dozen or so readers invest in income trusts? What are your thoughts on the 2011 deadline and it’s effects on dividend payouts?


The Passive Income Earner said…

I have 2 REIT income trusts; REI.UN and CUF.UN. They fall under a different category as they will not be impacted by the new tax on income trust. They yield 7.5% on both of them compounded monthly.

I also own CPG (which has recently converted) and JE.UN which is converting on January 1st. CPG is a company I had been following for a while and Just Energy for the last 5 months. CPG yields over 7% and JE.UN yields over 9% both compounded monthly.

At the moment, I will not touch non-REIT income trusts unless I know the conversion plans and trust the company. There is a number other oil related income trusts I look at but I am not in any position to pull the trigger.

I do see a lot of high yield income trusts but I am staying away. Companies like Yellow Pages, Cineplex, The Keg, Liquor Store and many more have high yields but no hope of increasing them I think. The yield goes up only when the price goes down 😩 Not what you want. Both CPG and JE.UN have had a history of increasing dividends which is why I liked them along with their solid business.

Addicted2dividends said…

I’ve been looking at those REITs Passive, And might get in when the time is right.

I agree on the other trust funds like the BP’s and liquor store; there’s no solid dividend growth.

I do have my eye on ENF.UN, It’s Enbridges income fund and it’s dividend has grown over the years. Let’s hope that oil spill business gets put under the rug asap!

Anonymous said…

I was thinking about dividend trusts, but after reading “Investment Zoo”, decided not to touch them, since dividend can’t grow in future, if company doesn’t diversify OR introduce more business. Income trusts party is over. Smart money leaves when things are still rosy. (and future is foggy).

Very good blog. Please keep it up.


Addicted2dividends said…

Thanks Anonymous. Anything with a high yield from the start can never be stable. The solid way to attain high yield is through dividend growth and slowly increase your yield over time.

The Passive Income Earner said…

@Anonymous I would like to say that Income Trust are changing except for REIT. You also need to look at all companies differently as some actually had dividend growth.

If you buy an income trust now, it needs to be based on what they are going to do come January 1, 2011 and the new SIFT tax come in play.

Many companies were converting to Income Trust purely on a tax advantage and that’s why the new tax rule is being put in place.

The only ones I have are REITs except for JE.UN which is temporarily an Income Trust until January 1, 2011. They have also increased their dividends regularly.

Financial Cents said…

Trust is relative – not all or nothing but exists on a long sliding scale.

I’ve got both HR.UN and REI.UN as holdings, that’s it for now.

Looking to add, but not until 2011 rolls around and many trusts convert.

I’m looking into JE.UN and DAY for 2011 TFSA holdings. Maybe IPL.UN b/c it is not converting; all should keep their yields until at least 2013 (Board of Directors said they would 🙂

Woodbridge said…

I have AltaGas (converted and reduced dividend so that the payout ratio is the same as Enbridge now), CPG and Inter Pipe.



About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

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