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Income trusts still have a place in RRSP investing

by Wayne Cheveldayoff, 2007-02-15

Donít rule out income trusts for your RRSP just because they have taken a hit from federal tax changes.

Many trusts are good businesses that will continue to pay healthy cash distributions and provide good growth for your portfolio over time.

In fact, the market is recognizing that now with the units of some trusts, such as Lakeport Brewing Income Fund, trading near the price they were at before the October 31, 2006 federal announcement of a new tax on trusts (except for real estate investment trusts (REITs) to be implemented in four yearís time.

A few trusts with good businesses may actually continue to grow in the coming four years and may be able to afford to pay the new tax without cutting distributions.

At the same time, there are some trusts that will have difficulty, with chances of slipping into oblivion.

Your job as an RRSP investor is to figure out which ones have a healthy business and good growth prospects and can be expected to maintain or even grow their distributions, so that you include only trusts from this group in your portfolio.

Unfortunately, the job is a tough one. It takes many hours of hard analysis and talking with management to come to a conclusion on just one trust. And there is now a couple hundred trusts traded on the TSX.

For those who havenít yet figured it out, a good source for ideas is ROBTV, a business television station run on cable with an archive of broadcasts available at

ROBTV interviews numerous portfolio managers each day and has special ďMarket CallĒ hours twice a day when individual investors can call in to ask questions about a particular company or income trust.

These portfolio managers and their associates spend their entire days researching companies and choosing their top picks for their own portfolios and it is quite fortunate for individual investors that they have access via ROBTV to this wisdom. (Itís not altruistic. ROBTV presumably emphasizes the top picks of portfolio managers because that is what individuals want to watch and giving people what they want to watch boosts ratings and brings in more advertising dollars.)

ROBTV puts pressure on portfolio managers to come up with their best picks by reviewing the performance of past picks and, if they did not perform, some hard questions about why not.

In an appearance in January, energy specialist Glenn MacNeill, VP of Investments at Sentry Select Capital Corp., chose CCS Income Trust (CCR.UN) and Progress Energy Trust (PGX.UN) among his top three picks.

On another show, his colleague Michael Simpson, Senior Portfolio Manager, chose BFI Canada (BFC.UN), Bell Aliant (BA.UN) and Taylor NGL LP (TAY.UN) as his top picks.

David Baskin of Baskin Financial Services named Yellow Pages Income Fund (YLO.UN) among his top picks on a recent program.

Of course, these picks should be treated as good ideas worthy of further research. Other sources of ideas would be brokerage analysts whose recommendations are available at full-service (and some discount) investment dealers.

For those without the time for research, the best way to hold income trusts may be through a mutual fund or closed-end fund managed by one of the portfolio managers (usual management expense ratio (MER) of around 2 per cent per year) or even an index-linked exchange traded fund (MER of around 0.5 per cent) focused on income trusts.

Whatever the way you choose to go, a collection of solid income trusts has the potential to produce the desired 8-to-10 per cent per year return that you need in your RRSP for retirement objectives to be achieved.

One advantage of income trusts as an investment vehicle is that management canít be sloppy without being quickly found out. Having to pay distributions monthly, with pressures to maintain and grow them, is a good discipline against reckless management behaviour, such as sinking capital into risky expansions.

Yes, management has to take risks to grow their business, but you would want them to stick to what they know best. There are no shortages of examples in Canadian business history (BCE, parent of Bell Canada, being one) of management going into completely different areas on the hope that diversification will bring riches. Bell investors in recent years have been poorly served by such excursions and clearly would have been better off if Bell management had been focused instead on paying monthly cash distributions.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. His columns are archived at and he can be contacted at

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©2007 Wayne Cheveldayoff