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Putting trust in trusts

TORONTO (GlobeinvestorGOLD) – What do peat moss, root beer and garbage all have in common? Simple -- you can invest in all three of these businesses as an income trust that yields 9 per cent or more.

Lots of investors have put their trust in trusts in the past couple of years and, with daily disasters like WorldCom, Adelphia et al, trusts still look highly attractive. But trusts are no different than another other type of security -- some are high quality, many are adequate and a few are sub-standard and bound to disappoint their unitholders by cutting their payouts. If you don’t feel you have the time or knowledge to judge a trust properly, you’re probably better offer buying a mutual fund that focuses on this market niche, or a specialized closed-end fund of trusts that trades on the Toronto Stock Exchange.

For two very compelling reasons, trusts are a hot spot in a stone-cold stock market. Many are appreciating in price these days while also spitting out a monthly distribution that might yield anywhere from 6 to 12 per cent. If held outside a registered account, this yield is all the more attractive because distributions from a trust generally get much more favourable tax treatment than income from a bond or GIC.

In the several months, there has been a virtual flood of new trusts brought to market. Among them:
-Sun Gro Horticulture, a big peat moss producer that now offers a yield of roughly 10.8 per cent.
-A&W Revenue Royalties Income, which sells burgers, fried chicken and root beer through the A&W chain of fast food restaurants and now yields about 9.1 per cent.
-BFI Canada Income Fund, a trust based on a waste-management business that yields something like 9 per cent.

Fat yields are only part of the picture with trusts, though. Equally important is the issue of the strength of the business that a trust is based on. Fast-food restaurants go in and out of vogue, a fact that could have an impact on A&W’s ability to maintain its distributions to unitholders. The garbage business sounds like the picture of stability, but what if there are problems at the landfill sites that BFI owns?

Risk is unavoidable when investing in the stock market, so there’s no such thing as an impregnable trust. Still, you’ll want to choose ones with quality assets that are conservatively managed. A key issue is whether a trust is paying out virtually all of its after-tax profits to unitholders, or whether it is able to keep some cash back in order to fund future growth.

Another issue is the type of business the trust is in. Business trusts, like A&W or BFI, are the riskiest and thus offer the highest yields. Next come oil and gas royalty trusts then pipeline and electrical power generating trusts. At the lower end of the risk scale are real-estate investment trusts.

Next week, we’ll look at where to find information on trusts, as well as mutual funds and closed-end funds that invest in trusts.

© The Globe and Mail

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