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Rob Carrick

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The rule of 10

Rob Carrick


OTTAWA (GlobeinvestorGOLD) — This holiday season, I’m giving myself the gift of 10-per-cent investment returns.

Deep down, isn’t this what most of us investors really want? Sure it is. That’s why I’d take a $10,000 windfall and sink it into a mini-basket of income trusts that would yield an average 10 per cent. The beauty of this gift is that no investing pyrotechnics are required to earn that 10 per cent. The trusts I choose will do all the work for me by shovelling out cash every month. Yes, there’s a risk that trusts can cut or even suspend their distributions altogether. So what? Life’s full or risks. Anyway, I’d diversify my trusts and try to go with a balance of quality and high yield.

Now for my shopping expedition. To start, I’ll take RioCan Real Estate Investment Trust, the largest REIT listed on the Toronto Stock Exchange with a market capitalization of $3.2-billion. RioCan’s business is retail real estate and it owns a portfolio of malls of varying sizes in nine provinces. The yield these days is about 7.04 per cent, which reflects RioCan’s status as a blue chip among trusts. Dominion Bond Rating Service has given RioCan a very solid STA-2 (low) rating, best among the 13 or so REITs it has analysed.

Next, I’ll take Superior Plus Income Fund, a business trust with a yield of about 8.3 per cent. Superior’s main line of business is selling propane, but it has diversified into drywall and chemicals for the pulp and paper industry. DBRS has assessed Superior and gives it an STA-3 (middle) rating, which is quite solid for a business trust.

Now for a trust in the power-generating category, considered to be among the most stable in the trust universe, but also the most vulnerable to rising interest rates. The choice here is Macquarie Power Income Fund, which yields about 9 per cent. Macquarie is a little riskier than larger power trusts like TransCanada Power because it’s based on a single power plant, yet S&P has still assigned it a good SR-2 stability rating.

Wondering how I’m going to get the average yield here up to 10 per cent? It’s easy — just add some oil and gas royalty trusts. These are the most volatile of all trusts, but they reward unitholders with some of the highest yields. To start, I’ll go with ARC Energy Trust, which has been described by the Money Reporter newsletter as "one of the best and safest income trusts in Canada." ARC yields about 11 per cent these days.

For a little extra oomph, I’ll also include Paramount Energy Trust and its yield of 15.8 per cent or so. With oil prices remaining high by historical standards, it’s logical to wonder what would happen to oil and gas trusts if the price of this commodity fell. This isn’t a big worry with Paramount because it’s focused on natural gas production. In fact, Paramount bills itself as the only trust 100-per-cent levered to natural gas.

Let’s say I invest $2,000 in each of these five trusts. On average, my yield would be 10.25 per cent annually. One of my five could disappoint and cut distributions, but let’s not rule out the possibility of a distribution increase that boosts the yield on my investment.

The other risk with income trusts is a decline in the unit price. In fact, the entire trust sector was so strong in the fall of 2004 that thoughts of a correction would certainly have been justified. Given that reality, I might wait for a sale — I mean, a market pullback — before I buy. The gift of double-digit returns is great and all, but buying it at Boxing Day prices is even better.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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