Also known as royalty trusts, income funds and unit trusts, income trusts are a special type of investment vehicle that are traded on the stock exchanges and pay out on a regular basis to their unitholders. As far as I know, these are also a uniquely Canadian product (if anything similar to income trusts exist in the U.S. In Canada, please let me know!). Canada has, perhaps, hundreds of them and they have really taken off as investment vehicles since about 2002 or so.
Examples
REITs (Real estate investment trusts) – e.g., RioCan Real Estate Investment Trust, Boardwalk REIT
Oil and Gas trusts – Vermilion, Harvest Energy, Provident Energy, Pengrowth, ARC Energy
Diversified Investment Trusts – Enervest Diversified Investments
You can recognize these trusts by their tickers, which usually end in .UN. For example, the tickers of some of the above trusts are: REI.UN, HTE.UN, EIT.UN.
What Are Income Trusts?
Income trusts are simply a different form of business structure than a corporation. They act like regular securities and trade on the stock exchange. In fact, some corporations are solely structured as trusts. A good example of this is the BFI Waste Management company in Canada (BFC.UN). The only difference is that pay their own taxes differently than regular corporations do. As a result, they are able to offset much more cashflow to their unitholders. Distributions are made monthly rather than quarterly.
What’s So Great About That?
Here’s what I really like about trusts.
1) You get paid monthly (it’s usually on the 15th; some pay on the 30th; even less have their own dates)
2) The yield is generally considerably higher than with regular corporations. In this case, it doesn’t mean that the company is under greater pressure, and it’s not a sign of weakness in their financials. They’re simply structured this way.
3) Because of 1) and 2), income trusts are ideal for pooling your money into an account and letting it accrue there as cashflow you can use later for reinvesting or as straight income. It’s like getting a paycheque since they come every month. Ideally, you could have a sizeable enough account full of these trusts and use it to live abroad for half the year.
Not All That Glitters…
Don’t get too excited yet. At least in Canada, by 2011, many of the income trusts (no one knows which at this point; they haven’t all decided yet) will convert back to a corporate structure. Some won’t. Some already have (eg., Transforce Income Fund (TIF.UN) is now simply (TIF).) The reasoning behind this is more complicated than I have the energy to explain right now, but the basic point is that the tax law changed, and so there will be less benefits to corporations for existing as an income trust. For investors, this means get them while the getting’s good! And pay attention when 2011 rolls around.
Other thoughts? Do you know of any good American or UK income trusts, or similar vehicles? I’d love to hear about it.
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Google master limited partnerships. There are 30-40 of them in the States and they are very similar to the trusts.
Thanks. Can individual foreign investors invest in these too?
Also, unit prices for Income Trusts had been on an upward rise for a while until Flaherty clamped down on the tax law (I believe he called it a loophole).
In any case, they still make good investments, especially the utilities or REITs.
Yep, Master limited partnerships in US are pretty close to what canada has in terms of Income Trusts. You could also invest in US REITS, they are yielding pretty well.
Another term to google is income deposit securities. These are hybrid securities which consist of a stock and a bond.
Thanks Dividend Growth – I’ll be checking those out. Sounds a bit like those split securities – where you can just invest in the “preferred dividend” part of the share rather than the growth of the share itself.