Wednesday, September 23, 2009

Income Investing - Canadian Royalty Trusts

This is part 3 of a 5 part mini-series on my thoughts about Income Investing. Today, we will focus on investing in Canadian Royalty Trust and how you can benefit from such an investment.

Canadian Royalty Trusts (Canroys)

Canadian Royalty Trusts very often tend to be related to energy. They are usually involved in oil and gas mining with the occasional coal mining. Some of the newer trusts actually focus on synthetic oil and coal. Because of they pay out majority of their cash flow as dividends (distribution), they enjoy a special tax exempt status compared to corporations. Many of these trusts actually do pay out a monthly dividend similar to REITs.

Canadian Royalty Trusts are able to grow their amount of reserves and do so primarily through the acquisition of other companies. A Canadian Royalty Trust basically controls an operating company which operates and runs the oil and gas fields.

Canadian Royalty Trusts run the risk of depleting their existing gas and oil reserves. This could result in their distributions being reduced over the years. It is therefore important to take into consideration the reserve life of gas and oil fields.

Another risk of Canadian Royalty Trusts is the expected tax change in 2011 that will remove their tax exempt status. This is because the ruling party in Canada believes that such royalty trusts are actually causing them lost revenue in the region of hundreds of millions of dollars. The announcement of the proposed tax changes caused a huge drop in the prices of many of these trusts. The so called "Halloween Massacre" came about just when some corporations announced their intention to covert into trusts structures. Any hope of this tax being removed is if the Liberal party comes into power.

Many Canadian Royalty Trusts are also exploring the option of coverting back into corporations with the removal of this special tax exempt status. With a 4 year grace period till the 2011 dateline, a coversion to a corporate structure will allow these trusts to reduce distributions and re-invest money for expansion. Other options also exist which include transforming into Master Limited Partnerships - which will enjoy tax advantages in the U.S.

Canadian Royalty Trusts are traded publicly on both the U.S. Stock Exchange as well as the Toronto Stock Exchange. To invest in these trusts, you need to have access through a brokerage firm to either the US stock market or the Canadian stock market.

Investors invest in Canadian Royalty Trusts primarily for their high dividend yields. With the proposed tax changes, the future of canadian royalty trusts are a bit more uncertain and 2010 could prove a volatile period with all the expected changes.

The writer owns Canadian Royalty Trusts in his portfolio. He likes the monthly dividends he receives but is uncertain about the viability and certainity of Canroys in the future.

READ ENTIRE SERIES:
1.Investing in High Dividend Yield Stocks
2. Investing in REITs
3. Investing in Canroys
4. Investing in Rental Property
5. Investing in Bonds

SEE RELATED POSTS:
Read : The 25% Cash Machine
Read: Dividends I have Received Thus Far

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