What Are Canadian Royalty Trusts?
Mar 19th, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
Canadian Royalty Trusts, also called Canroys, are a subset of a class of investments called Canadian Income Trusts. Royalty Trusts invest in oil and gas resources. But Income Trusts can invest in businesses, real estate and utilities.
In terms of taxation, they get similar treatment as US REITs. They have to distribute most of the profits out to the shareholders (only they’re now called unit holders) and the dividends aren’t taxed at the corporate level. This means that there usually more dividends to pass through to the unit holders. And at the unit holders level, there’s a flat 15% tax.
If you are a US unit holder, you still have to pay the tax, but you get a credit for that tax, so you do not get taxed twice.
There are several Income Trusts that pay out pretty good dividends. I currently own Advantage Energy Fund (it trades as AVN.UN on the Toronto Stock Exchange and as AAV on the NYSE) which is a Canroy that currently pays out over 15% in annual dividends. I also own Prism Income Fund ( QSR.UN on the TSX) which is a Business Trust that pays out 11.33% annually in dividends. Both of these Trusts pays the dividend on a monthly basis.
One of the disadvantages with Trusts is that since they do not retain any earnings for future growth, all expansion must be raised through secondary offerings. In case of oil and gas Trusts, because of the depletion of the resources, they are forced to do this at regular intervals.
Right now, the prices for most Trusts are depressed. Last Halloween, the Canadian Finance Minister Jim Flaherty reneged on a party policy not to increase taxes and announced that in 2011, the special tax treatment for Income Trusts (except REITs) would be removed. (well, they still need to vote on this).
Faced with the possibility of paying up to 40% of the dividends in taxes, investors bailed, driving the share prices down. Personally, I don’t personally believe that the law removing the special tax treatment will be passed. At todays prices, if you can get 12% dividend (compounded monthly), over a 4 year period thats a return of over 60% (You can do these sort of calculations here). So even if the tax does go through, you’ve already gotten more than half of your money back.
I expect the price of oil to eventually head north of $75/barrel and gas prices to also stay high. So the dividends should increase over time for oil and gas trusts. Prism (which owns the royalties to fast food franchises) also has a history of periodically increasing its dividend. I think the rewards far outweigh the risks, so I’m willing to take this bet.
The information provided here is for educational purposes and isn’t a recommendation to buy the stocks mentioned. Do your own research before investing, and never take any blog post to be the final word for any investment!
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9 Responses to “What Are Canadian Royalty Trusts?”
I think in the long run, most energy companies will be good investments. Imagine if the tax law does not pass, you will see the trusts that dropped like crazy jump up 20-25%! I’m holding onto PDS right now and that has been pretty steady around $22-$22.5 range while delivering close to 8% dividend if I remember correctly.
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I used to own quite a bit of PWI and PVX, which were double digit yielders but have since slowed a bit. There’s still pretty good options for nice double digit income though - energy plays. There are some similar options outside of Canada too, not necessarily related to energy. IAF is my favorite, it’s Australian and has been performing spectacularly. I’ve profiled plenty of others. Bottom line is that there are some great options out there, especially if in self-directed IRA.
Dan at everydayfinance
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[…] Value stocks typically return a dividend between 2.5% to 10% depending on the industry they’re in and the prevailing market conditions. Growth stocks typically do not provide a dividend, and if they do its usually less then 2.5%. They usually retain their earnings for future growth. Many stock analysts and investors believe that returning money to shareholders means that the management is running out of ideas on how to grow the business and avoid dividend paying stocks like the plague! Personally I’m partial towards dividend-paying stocks. I especially like the Canadian Income Funds that invest in Oil and Gas. […]
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How is AAV looking now…….
[…] you’d like to profit from the increase in oil and gas prices, you could check out Canadian Royalty Trusts (also called Canroys) that specialise in the oil and gas business. This is the easiest and most […]