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Canadian Energy Trusts
Old 02-19-2006, 04:11 PM   #1
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Canadian Energy Trusts

I read a thread (and I think it was on this board but I can't find it) where someone talked about a bunch of Canadian trusts that paid 10%+ dividends. I was wondering whether anyone could point me to a list of them and describe the pros/cons. Surely there must be some cons/downside to sustain a 10% dividend?
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Re: Canadian Energy Trusts
Old 02-19-2006, 04:26 PM   #2
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Re: Canadian Energy Trusts

I hold Fording Coal (fdg) Trust in IRA.* Has done well - dividend about 14%.* Haven't noticed any downside.
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Re: Canadian Energy Trusts
Old 02-19-2006, 06:04 PM   #3
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Re: Canadian Energy Trusts

Quote:
Originally Posted by macdaddy
I read a thread (and I think it was on this board but I can't find it) where someone talked about a bunch of Canadian trusts that paid 10%+ dividends. I was wondering whether anyone could point me to a list of them and describe the pros/cons. Surely there must be some cons/downside to sustain a 10% dividend?
Two downsides that come to mind fairly quickly:

1) They sell their natural resources and distribute the proceeds. Eventually, they will run out of oil/gas/coal/etc. You could say the same about major oil companies, but trusts (IMO) are far less agile and geographically diverse in being able to drill new wells anywhere, compared to an oil company.

2) Just about any and every resource trust is shelling out healthy dividends right now due to record prices. Not many people expect oil to drop down to previous levels, so you can have some relative stability in some oil trusts (assuming future production levels won't be an issue); however, I don't know if future coal/etc. prices will behave similarly. If natural resource prices revert somewhat to the mean in the future, those juicy dividends will drop closer to previous dividend levels (check "Historical prices" on Yahoo to see what previous dividend levels are, and compare to current levels).

Having said that, I'm taking a good look at Ralstas's FDG recommendation. I currently own PTF (current yield about 10.4%, yield off cost of about 14.4%), and will likely pick up 100 or so of FDG on Tuesday.

Two other downfalls:
1) Possibility of Canadian withholding taxes taken out (although, you can deduct them on your 1040 as "foreign taxes paid")
2) If the Canadian Dollar falls in value, those Canadian distributions will convert to fewer dollars (conversely, if the Canadian $ keeps rising, those dividend payments will increase - assuming you live in the US).
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Re: Canadian Energy Trusts
Old 02-19-2006, 06:41 PM   #4
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Re: Canadian Energy Trusts

The best course of action is to buy a Trust of Trusts , like EIT.UN or SDT.UN, you get exposure to Oil and to Gas, plus other Industries.

AET.UN is the best for a straight energy play.

10% of my monies are in Trusts.

The $CDN will be worth $0.95 US within a year.
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Re: Canadian Energy Trusts
Old 02-19-2006, 09:08 PM   #5
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Re: Canadian Energy Trusts

There are Canadian energy trusts, such as oil, gas, coal trusts which are paying out like bandits now that energy prices are so high. Buying now would almost be buying at the peak. A large gamble because commodity prices could drop quickly within the year. Not only would the distributions go down, so will the share unit prices. A double whammy.

There are also Canadian income trusts based on pipelines, yellow pages and such. Those would behave more like utilities with a slightly higher payout since all dividends are paid to the shareholders before income taxes.

Canada is concerned about the tax leakage to non-residents since withholding tax for non-residents can be less than the income tax rates those same companies would have otherwise paid the federal government as corporations.
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Re: Canadian Energy Trusts
Old 02-20-2006, 03:33 AM   #6
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Re: Canadian Energy Trusts

This is only partly true.

U.S. trust cannot replenish their reserves, so they are a dying asset. Canadian trusts can buy new wells to ensure their reserves keep up. However, Canada only has so much oil and gas ultimately and there is some talk that companies like Encana are already having to go elsewhere to buy more oil. So it is not clear to me how realistic it is that Can trusts will be there with reserves in say 10-20 years when you go to retire. For this reason I like companies like BP that are replacing 95-100% of reserves annually (have done so the part 7 years) instead of Shell that are only replacing 50-70% annually. The share price doesn't move with the price of oil like many Can trusts do tho'.

Petey

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Originally Posted by Peter76
Two downsides that come to mind fairly quickly:

1) They sell their natural resources and distribute the proceeds.* Eventually, they will run out of oil/gas/coal/etc. You could say the same about major oil companies, but trusts (IMO) are far less agile and geographically diverse in being able to drill new wells anywhere, compared to an oil company.
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Re: Canadian Energy Trusts
Old 02-20-2006, 09:52 AM   #7
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Re: Canadian Energy Trusts

Go look at other sectors, IMO. Energy trusts have been bid up spectacularly with commodity prices and there are other sectors paying attractive yields. For example, they aren't without risk, but many bulk shipping companies (like DSX, EGLE, SSW, GSTL, etc.) are paying 14 to 16%. STON (cemetaries) yields about 9%. SPH spits out 8 or 9%. There are also a number of exchange-traded preferreds that yield 8 to 10%.
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Re: Canadian Energy Trusts
Old 02-20-2006, 06:56 PM   #8
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Re: Canadian Energy Trusts

Agreed that energy trusts are on the high side now. Not worth the downside risk.
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Re: Canadian Energy Trusts
Old 02-21-2006, 09:39 AM   #9
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Re: Canadian Energy Trusts

I've been investing in these trusts for the past ~5 years and while I've been very happy with the returns have to agree with others here that you need to watch out for buying at the top.

For the oil and gas trusts you need to take a look at how many years of "proven plus probable" reserves they have. An excellent source of information on these trusts is: http://mcdep.com/. I recommend spending some time there looking at the rating system and buy/sell recommendations.

There is also a book on the subject, "Canadian Income Funds," by Peter Bck and Simon Romano, which offers a good overview.

I personally prefer to own individual trusts rather than funds of funds because I hate paying managment fees and WANT the concentration in energy trusts with many years of proven reserves and a track record of high dividends.

I bought Enerplus (ERF) years ago and it has been great, but would think it too rich to buy at today's prices. Still they are the biggest and worth looking at for their track record. PennWest is excellent, and I also own Canadian Oil Sands, which has 3x the reserves of any other trust, though its dividend payouts to date have been modest.

I treat these trusts as somewhat of a hybrid investment - volatile energy stocks yes, but with their consistent high dividend payouts they also behave like an ultra-high-yield bond. A useful diversifier in modest quantities, depending on the rest of your portfolio.

Hope this helps

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Re: Canadian Energy Trusts
Old 02-21-2006, 09:52 AM   #10
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Re: Canadian Energy Trusts

Kev.,

Interesting way to look at these kind of plays.

Not sure it is easy to know when a good time to buy is, if one buys at NAV. Perhaps just a matter of whether oil or gas are high vs historical average or your own perspective on peak oil and the substainable price level going forward.

I'd welcome more thoughts from you.

Petey

Quote:
Originally Posted by kevink
I've been investing in these trusts for the past ~5 years and while I've been very happy with the returns have to agree with others here that you need to watch out for buying at the top.

I treat these trusts as somewhat of a hybrid investment - volatile energy stocks yes, but with their consistent high dividend payouts they also behave like an ultra-high-yield bond. A useful diversifier in modest quantities, depending on the rest of your portfolio.

Hope this helps

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Re: Canadian Energy Trusts
Old 02-21-2006, 10:19 AM   #11
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Re: Canadian Energy Trusts

Hi Petey,

My take on things - espeically after reading "The Coming Generational Storm" and a bunch of Scott Burns' columns- is that with Chinese and Indian demand for oil and gas sure to skyrocket and the U.S. highly unlikely to change its wasteful ways, the future for energy prices in our lifetimes is likely to generally be steeply up.

I know a number of smart people who have bought these trusts just for the dividend income and who simply don't care what the share price is. I don't think I'd go that far, but I don't think these funds as a whole are overvalued by any means. They are still not all that well-known.

For what it's worth - and it may be just one guy's mistaken take on things - I have 10% of our total portfolio in these trusts, in lieu of, say, Pimco Commodity Real Return (PCRIX) or a pure energy fund or ETF like Vanguard's. I like the Canadian trusts better because (a) they pay dividends; (b) their returns, unlike energy stock funds, aren't correlated with the broader U.S. stock market indexes.

I also have 10% in Vanguard REIT Index.

The rest of our portfolio is invested very much like stock and bond parts of the Rational Investing Portfolio in ESR Bob's excellent book, "Live More, Work Less." Stocks are about 50:50 domestic to foreign, all in DFA funds, with a small cap/emerging markets tilt, bonds very conservative but with about 25% of the total in non U.S. bond funds. The reason I feel okay about having only 40% in fixed income is because of that other 20%, which is invested in things that provide significant dividend income. Otherwise I'd be at 50% fixed, given my conservative nature.

It's a compromise: 80% of the portolio respects the historical returns of the various asset classes, the 20% in oil and gas and REITS reflects my take on future trends: I think the U.S. dollar is "toast" (quoting Scott Burns), prefer real assets to equities, and think the U.S. gov't will remain in denial about entitlements, deficits and squandering the world's oil supply. The day I see $4.50 a gallon gas here or mandatory 40 m.p.g. cars is the day I'll change the allocation.

Probably way more info than you wanted!
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Re: Canadian Energy Trusts
Old 02-24-2006, 11:23 AM   #12
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Re: Canadian Energy Trusts

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Originally Posted by Michael 95
The best course of action is to buy a Trust of Trusts , like EIT.UN or SDT.UN, you get exposure to Oil and to Gas, plus other Industries.
I can get quotes on EIT (EVDVF) and SDT (SSDUF) on Vanguard's website...if I buy the pink sheets securities, I assume that I will still receive the dividend converted to American Dollars?
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