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Weekly Insight

Alternatives to trusts

TORONTO (GlobeinvestorGOLD) — If you’re uncomfortable about investing more money in trusts because of uncertainty over what Ottawa may do to the sector but still need enhanced income, what options do you have? Here are some to consider.

High-yield bonds: These are corporate issues that usually have low credit ratings. The yields are higher than those of government bonds but so is the risk. The key to success is understanding credit risk and minimizing it to the extent possible.

High-yield bond funds: The main problem with high-yield bond funds is that many of them invest heavily in U.S. issues because the Canadian market is very small. This adds currency risk to the equation and, with the rising loonie, suppresses returns. My top choice in this category is the Phillips, Hager & North High Yield Bond Fund. It has almost no U.S. exposure so currency is not an issue. The fund gained 8.8 per cent in the year to Sept. 30, about double the average for its category. Quarterly distributions are paid at the rate of 15c a unit for a projected cash yield of 5.2 per cent based on a net asset value of $11.48.

High dividend common stocks: One thing is sure – dividends will not be hit by any trust crackdown in Ottawa. In fact, they may become even more attractive if one of the remedies Mr. Goodale chooses is to cut the effective tax on dividends, thereby reducing or eliminating double taxation. One of the top choices in this group in my Income Investor newsletter is First Capital Realty (TSX: FCR) which has a dividend yield of about 6 per cent based on a recent price of $20.15.

Growth dividend common stocks: These are stocks which may not offer a high yield right away but which have a history of steadily increasing dividends over time. As a result, the yield based on the original purchase price will gradually increase. As well, these stocks have enhanced capital gains potential. CI Investments (TSX: CIX) is an example. When I recommended the shares in The Income Investor in April 2004, they were priced at $15.80 and paying a quarterly dividend of 12.5c (50c a year), to yield 3.2 per cent. Today, they are making monthly payments of 6c a share (72c a year) and the yield based on the original purchase price is up to 4.6 per cent. As a bonus, the stock price has moved up to the $21.50 range so investors have a nice capital gain as well. CN Rail, which was picked in the October issue of the newsletter, also falls into this category.

Many income funds, both open-end (mutual funds) and closed-end (exchange-traded) are heavily weighted towards income trusts, making new purchases unattractive right now for investors who are concerned about what the government might do. But there are some that have minimal trust exposure and are therefore worth considering if you are among the worriers. One example is the Mackenzie Sentinel Income Fund. This is a conservatively-managed fund which had only 7.4 per cent of its assets in income trusts entering 2005. It makes monthly distributions of 3.33c per unit (40c a year) for a yield of 4.3 per cent based on a net asset value of $9.23.

Check with a financial advisor to see if any of these suggestions are appropriate for your needs.

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