Thursday, April 5, 2007

The Right Market at The Right time

Below is an article published by Roger Conrad an American newsletter writer. I think he is being overly optimistic about Canadian Income Trusts but I figure my readers may find his article interesting.

Some of his comments with respect to the Trust tax legislation are out of date so I edited those portions out.


by Roger Conrad Editor, Utility & Income
April 4, 2007

Remember when investors could retire and live well on a modest nest egg? Remember when taxes were only 15% a year, and when you didn't have to worry about losing your shirt before the closing bell?

That way of life has gradually been taken from you. But this letter is going to bring it all back, courtesy of the Canadian government.
They've invented a whole new kind of investment, one that's pulling hundreds of billions of US dollars across the border into Canada today.In a nutshell, Canadian Income Trusts are a brilliant structure that allows a business to avoid taxes--all taxes.

That's one pretty obvious reason they're so popular.The other big reason is that by Canadian law, nearly all the earnings from a trust business must flow right through to its investors, which in this case means you.

You no longer have to settle for the bread crumbs we call "dividends" here in the South 50!Here's how trusts work up North: A trust uses what it receives from its product sales to pay general expenses and service any debt, and it also sets aside a little bit for exploration or development. Trusts are very careful to set aside no more than 15% of their gross profits, so at least 85% normally goes directly to your mailboxevery month. In other words, you usually get a check for about 85% of the true earnings. Sometimes it's near 100%!Life doesn't get any smoother than that.

Canadian income trusts aren't structured for the benefit of their CEOs, but their shareholders.

What a concept!

Canadian Income Trusts: A Screaming "BUY" Opportunity

On Halloween day last year, Canadian Finance Minister Jim Flaherty decided that no more companies should be allowed to convert into trusts and that virtually all existing trusts should lose their tax-exemption starting in 2011.

Four years is an eternity in politics. It gives Canadian authorities plenty of time to allow certain businesses back into the income trust fold. (I'm convinced that what they really want is to restrict the format to the natural resource companies it was intended for--not to kill the trust format altogether.)

A year from now, I bet we'll barely remember this Halloween scare. And look on the bright side: It's hard to lose if you buy in now.

Trust prices have fallen in the face of uncertainty, giving you a great entry point and super-sized yields. Trusts that were yielding 10% the day before Halloween are now paying 12%. The actual businesses underlying these trusts haven't changed a bit. Conservatively run, high-quality income trusts are as solid as ever, and I have no doubt they'll prevail for years to come.

Remember, the current yields still hold until 2011. So the owners of Precision Drilling, just to pick one of my favorites, will still receive 13.2% on their capital for the next four years. And even if they're taxed four years from now, these companies will still be paying yields that dwarf your options in the Dow and S&P. Dozens of trusts now yield more than 10%, some as high as 21%.

Bottom line: I'm pounding the table because there are still plenty of trusts worth buying and holding for the long haul as their businesses grow.

No comments: