Small-cap income trusts can be rewarding

Small-cap stocks, of course, come with a type of risk all their own. Small companies in general can, and occasionally do, succumb to events or business conditions that larger companies can withstand. Small-cap income trusts share this risk. But the rewards of well-chosen small-cap companies and small-cap income trusts can be attractive.


Small-cap income trusts can be rewarding, income trusts, guaranteed fixed-income securities

You shouldn’t think of income trusts as guaranteed fixed-income securities. Investors in such large-cap trusts as H&R REIT and RioCan REIT know only too well what we mean. Rather, think of them as mature businesses that throw off a lot of cash — most of the time — with less need for ongoing reinvestment than a regular business corporation.

Seen in this light, income trusts as a group can and do include some rather small companies that share those characteristics with many large, long-established companies.

Two such small-cap trusts we think worth your consideration are Alaris Equity Partners and
Chemtrade Logistics. Both have characteristics we feel reduce small-business risk. And both offer distributions that exceed eight per cent at current prices.

Alaris Equity Partners Income Trust (TSX—AD.UN) provides alternative financing to private companies in exchange for distributions with the principal objective of generating stable and predictable cash flows for payment of distributions to unitholders of the Trust.

Given the turbulence in world financial markets, it’s no surprise that Alaris’ market for deploying capital has been soft lately. But the company’s investment portfolio remains strong.

The weighted average combined earnings coverage ratio for Alaris’ partners is greater than 1.75 times, with 14 of 18 partners reporting ratios greater than 1.5. A ratio of 1.00 indicates the partner can fund all its commitments. It should also be remembered that the company weathered the COVID pandemic fairly well.

Chemtrade Logistics Income Fund (TSX—CHE.UN) provides industrial chemicals and services to customers in North America and around the world. It provides sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, sodium chlorate, sodium nitrate and several other chemicals.

Despite global economic turmoil, Chemtrade has benefited from strong demand and pricing for its products. This has led the company to increase its 2022 EBITDA (earnings before interest, taxes, depreciation and amortization) guidance. Meanwhile, its net-debt-to-adjusted EBITDA ratio has improved to a more acceptable 3.2 times from 6.1 times a year ago.

Buy both stocks for growth and income.

This is an edited version of an article that was originally published for subscribers in the November 4, 2022 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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