Market recovery boosts results in 2019

2019 was a great year for income stocks and trusts. The main trust index was up just over 23 per cent, the REIT index about 12 per cent and the S&P/TSX Composite Index gained about 16 per cent.

While indexes are one thing, the various categories and individual constituents can stray far from those averages. For example, among our list of income stocks and trusts, the average price gain in 2019 was 13.2 per cent. But returns ranged from a 76-per-cent price increase from Brookfield Renewable (which lost 18 per cent in 2018) to a 30-per-cent price loss in the shares of Enerplus, which has laboured under uncertainty about energy prices and negative sentiment toward sources of carbon energy.

As growth and income investors, however, our main focus is on the total return of our portfolios, including the distributions and dividends. And by that measure, for our list of recommended income stocks and trusts, the total return from a year ago is 19.4 per cent.

We’ll look at each of the categories and some individual plays below, but first we should take a moment to explain how these total returns are calculated. The following explanation refers not only to the trusts table, but also to the common stock, mutual fund, preferred share and bond tables we publish.

We’ll take Pembina Pipeline as an example. From the end of 2018 to the end of 2019, Pembina’s price rose from $44.25 a share to $47.10, a 6.4-per-cent gain. During the course of the year, the company paid out a dividend of $2.35 a share (note that it now pays out an annual dividend of $2.40 a share, as it raised its monthly dividend per share in June from $0.19 to $0.20). Add $2.35 to Pembina’s end price of $47.10 and you get $49.45. When you subtract $44.25 from the ending price of $49.45, you get $5.20 a share—the total amount in capital gain plus the income from your Pembina shares. This equals to an 11.8-per-cent gain on the $44.25 a share you started with at the end of 2018.

In order of category performance from best to worst, here is how our groups made out in 2019:

Power generation securities were the best

Our power generation issues enjoyed a total return of 45.6 per cent in 2018. This increase was powered by a 76-per-cent rise in the units of Brookfield Renewable Partners, which benefited from the strong appetite for infrastructure plays.

Pipelines and midstream was second-best

These holdings benefited from a strong performance from AltaGas Ltd., which has made progress at improving its balance sheet. On average, the total return for this group was 24.3 per cent, with Pembina Pipeline returning 11.8 per cent.

Business trusts were third-best

Our business trust category was the third-best performer in 2019, but it still ended the year with a 23.9-per-cent return. This category was led by another infrastructure play, Brookfield Infrastructure, whose total return was 39.3 per cent.

REITs perform well

Though REITs rank fourth on the performance list, they nonetheless produced a strong total return of 15.5 per cent. These interest-sensitive issues benefit from lower interest rates. And the trend for interest rates in 2019 was down as central banks cut their rates to head off a possible recession. CAP REIT was a particularly strong performer, with a total return of 21.8 per cent. We currently rate this REIT a hold.

Income funds also do well

Like most of our other categories, income funds acquitted themselves very well in 2019. Our two income funds posted an average total return of 13.4 per cent. Blue Ribbon Income Fund led the way with a 15.3-per-cent return. Declining bond yields have favoured the high-yielding securities in which this closed-end fund invests. Purpose Multi-Asset Income Fund followed up the rear with an 11.4-per-cent return.

Oil and gas stocks do poorly

Our oil and gas stocks have been a disappointment this year, delivering a negative total return of 15.5 per cent. Energy prices have been mixed. West Texas intermediate is up 12.6 per cent year to date, but natural gas is down 29.2 per cent over the same time. Though West Texas intermediate has done well, it remains stuck below US$60 a barrel as concerns about over-supply and economic growth have weighed on its price.

The year in review

Compared to 2018, 2019 was generally an excellent year for our income stocks and trusts. But our list overall underperformed the TSX in terms of price change.

This is an edited version of an article that was originally published for subscribers in the January 3, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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