December Idea of the Month: Steady Income with select CanRoys

By Travis Johnson, Stock Gumshoe, December 18, 2009


I remain entirely surprised by the extent of the stock market rally this year, and by the optimism of the investing punditocracy as they predict massive gains ahead in the markets as the economy improves in 2010. I’m no macro maven, and I certainly can’t predict the future any better than anyone else, but I do think that the great growth stories are few and far between right now — and the ones that are out there tend to be quite expensive.

So this month, I thought it might make sense to check out a couple of income-oriented investments for you, once again — one that that is a steady and predictable yielder with a dividend near 10%, and the other that has a similar dividend but a forecast cut in its future … but that is also focused more on growth.

These are both Canadian Income Trusts, which are sometimes called Canadian Royalty Trusts or CanRoys, and yes, both of them are going to stop being trusts at some point in the next year or so. CanRoys were a hugely popular investment several years ago because they paid extremely high dividends, were often taxed just the same as corporate dividends (so they got the US dividend tax cut), and were exposed to the rapidly growing oil and gas sector. Like REITs or MLPs, these trusts were set up as pass-through entities, with no tax at the trust level and all the taxes paid by investors on their dividend income. That quickly became untenable for Canadian politicians as foreigners, particularly Americans, started buying up CanRoys in greater volume, and as more of their blue-chip corporations began to consider converting into similar kinds of trusts. So that fondness for CanRoys got a huge haircut when the “Halloween Surprise” a few years back (in the form of a tax law change that goes into effect about a year from now) promised to essentially do away with the Trust structure, making these kinds of companies fully taxable just like regular corporations.

But these companies aren’t going away — and in many cases, they’re also not going to stop being income-focused entities, they’ll just have to adjust … some better than others. A few of these trusts have been bought out or merged with corporations, some have already converted into “growth oriented” corporations, and most have plans to convert soon. And with ...

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