Investor’s Digest of Canada regularly publishes essential information on the most widely-covered income trusts by leading analysts across Canada. Of the 49 income trusts followed by Investor’s Digest, here are 14 from six sectors of the income trust market in which to invest now.
Ottawa may have knocked income trusts for a loop back in 2011 when it decided to tax them like regular companies.
Yet many trusts have not only adapted to the new order, but have actually grown stronger.
Which ones? Clearly, those that continue to generate a steady flow of cash. Without it, a trust can’t sustain its distributions. And if a trust can’t sustain its distributions, why buy it in the first place?
Here are some good sectors of the income trust market in which to invest:
■ Power generation trusts. Compared to other sectors, power generation is fairly stable. Electricity, after all, is essential; so demand is steady.
And because most generating assets boast long lives and low maintenance costs, their operating conditions are good.
A solid sector bet? Toronto-based Northland Power Inc. (TSX─NPI), which generates electricity from natural gas and renewable resources.
■ Pipeline trusts. Pipeline funds aren’t as sensitive as oil and gas trusts to short-term swings in commodity prices. But they can still take a hit over the long term from a prolonged fall-off in demand for their services. The fees pipelines charge can be established tariffs, or specially contracted rates.
Best buys in this sector include Enbridge Income Fund Holdings Inc. (TSX─ENF), Veresen Inc. (TSX─VSN) and Pembina Pipeline Corp. (TSX─PPL).
■ Real estate trusts. With its expectation of cash flows, real estate fits snugly into the trust structure. Apart from deductions for maintenance and new acquisitions, real estate trusts distribute almost all their cash flow to their unit holders.
In addition to hotels, office buildings and commercial properties, REITs also own apartment blocks, long-term care facilities and shopping centres.
If you’re looking for good REITs, you might consider Canadian Real Estate Investment Trust (TSX─REF.UN), CAP REIT (TSX─CAR.UN), RioCan REIT (TSX─REI.UN), or H&R REIT (TSX─HR.UN).
■ Oil and gas trusts. These types of trusts are volatile for the simple reason that oil and gas is volatile.
Unlike regular resource companies, oil and gas trusts spend little money on exploration, distributing virtually all their cash flow to their unit holders.
So, as the trusts work their properties, they must find new reserves to replace those they use up.
If you can accept the volatility, you might consider buying Canadian Oil Sands Ltd. (TSX─COS), Freehold Royalties Ltd. (TSX─FRU), or ARC Resources Ltd. (TSX─ARX).
■ Business income trusts. Trusts that aren’t easily pigeonholed fall into the business trust sector.
Such trusts may own restaurants, newspapers, data centres, or public storage facilities. Not only do the best business trusts operate in mature industries, but they also boast long-life assets.
A good sector bet is Toronto-based DH Corp. (TSX─DH). Formerly known as Davis + Henderson, DH is probably best known for printing checks for banks and financial institutions.
■ Income trust funds. Here, there are two options: a mutual fund that invests in income trusts or a closed-end fund.
Closed-end funds are likely better because their fees are lower. Although mutual funds average a management expense ratio of 2.25 per cent, closed-end funds weigh in at just 1.5 per cent.
Two good candidates are Blue Ribbon Income Fund (TSX─RBN.UN) and Aston Hill VIP Income Fund (TSX─VIP.UN).
Investor’s Digest of Canada, MPL Communications Inc.
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