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Trust Distributions Under Immense Pressure

Don’t be surprised to see your income trust distribution cut to zero. Forget 2011. Without a distribution, the preferrential tax treatment that a trust provides over a regular corporation doesn’t mean that much.

In an effort to keep balance sheets in order, REIT’s, Oil and Gas Trusts, and to a lesser extent business trusts are cutting distributions to conserve cash. The reason for this is two fold.

One is the economic uncertainty but the other is the uncertainty of being able to renew upcoming mortgages and convertible debt on the balance sheets.

By keeping earnings in the company, they will be able to be in a better position to pay off debt as it matures or be able to renew financing at less onerous terms.

In most cases, don’t buy an income trust based on its current yield as that yield is not particularly safe. Look at their convertible debt before buying their units as the yields are pretty frothy and provide an extra layer of ssecurity over the units.

Better yet, look at corporate bonds that are yielding 7% or more as you could see some capital appreciation along the way.

If you are looking at trusts that most probably have safe distributions, National Bank analysts point to Inter Pipeline with a current yield of 11.42%, Keyera Facilities yielding 11.14%. On the REIT front, Boardwalk REIT at 6.81% or CAP REIT yielding 8.05% are safer bets. On the business front, A & W reported very strong same store sales growth of 7.5% for the last quarter and is now paying 10.70% based on todays closing price of $12.83.

Are you buying trusts right now based on current yields? Your comments are always welcome.


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