What’s Next After Income Trusts?

I’m sure there are quite a few income trust investors who got badly burned in Ottawa’s Halloween “all trick, no treat” surprise last year. So far, we have lamented on the situation long enough. The next thing to do is to find what other income-generating investment vehicles might be suitable for our subscribers..

The first thought that sprung to mind was bank stocks. They are rock-solid, supported by strong profits on top of offering dividends. The only problem is that bank dividends typically generate yields from 2.8% to 3.8%, which pale in comparison to the 6% to 12% that income trusts were offering. But, if you wish to avoid headaches and heartache, bank stocks might not be a bad idea, particularly considering how well these stocks have performed recently.

Another option are quality preferred shares. Over the years, preferred shares have lost the popularity contest to income trusts. The downside to investing in preferred shares is that they offer little in terms of market price appreciation, and they are sensitive to interest rate fluctuations like bonds. However, their quarterly distributions are a much safer bet than common stock dividends, and currently, their yields sit around 4.5%.

Cold chills that Ottawa has sent down the spines of many Canadians have had an effect similar to the intoxicating effect of alcohol — that increasing your consumption only beautifies the ugliest people in the bar. Suddenly, it matters little how uninviting the low interest environment really is, as many Canadians settle for 4% on GICs and similar instruments.

But, there is a way to maximize the “high safety, low returns” rule of the fixed-income world. Talk to your broker about splitting the income generating segment of your portfolio between GICs and quality bonds for terms from one to five years. This way you might also have a chance to profit from fluctuating interest rates. As your money matures, if interest rates go down, at least you can reinvest it at lower rates. And, if the rates go up, your money will mature at higher rates.

Finally, investing in bonds might be an option for Canadians who need predictable income from their portfolios. Provincial bonds are a great way to start, as they offer much in terms of safety of your principal and their yields are slightly higher than those of federal government bonds.

In addition, if you are wishing for higher yields, review the selection of corporate bonds. Talk to your broker about their ratings in relation to the safety of your investment. You might look into bonds issued by financially strong corporations, such as the big banks, for example. The last thing Canadian investors need now are bond defaults, as was the case with Air Canada a few years ago. And they certainly don’t need to buy into corporate bonds with junk ratings that offer higher yields, but might default on their coupon payments due to the issuing corporations having financial difficulties.

So, you see, there is life after income trusts. It might not be as lavish, but at this point, I have a feeling many Canadians would have preferred that income trusts had never entered our investing arena