Income Trust Announcement of October 31 2006
I happened to be at the cottage for the income trust announcement on October 31st. Vindicated was the word that came to my mind and a big smile came to my face. “Yes”, I said to myself in my out loud voice. Finally, these 'trusts' have be recognized for what they are: an unnatural form of business organization. The Globe and Mail called them “legal wizardry”.
Many seniors are right some upset. They bought a high yield piece of paper…essentially a junk bond…and now blame someone else for their loss. 'Twas ever thus. If a bank common stock yields 3%, and a GIC just a bit more, while at the same time a trust pays 9%, you have to admit there's a lot of risk involved with a trust.
I hope, like in the Nortel bubble of 2001, you got out of BCE in time. It was just luck that my October report was a week early and I addressed the bad news facing telecoms in that report (“fundamentally lower level of earnings that we've seen historically”). If you did not sell in time, your BCE is priced the way it was a month ago: no big deal. BCE might even raise their dividend next year: the Bell trust was planning to pay out $2.55 a year. The healthiest income trusts will, most likely, be converted back to traditional publically traded companies. Hence, if you still hold BCE or BA.UN, I would not worry: your old MT&T, which became Aliant, and then went the trust route (BA.UN) in an effort to help BCE's share price. BA.UN has recovered in price since November 1st.
The Investment Reporter's October 27 issue specifically recommended BCE (at $31.87) and Telus (at $61.82) p. 339. I bet they would like to eat those words now. In contrast, I thought the increase in price due to the excitement over the trust conversions was “a chance to get out, if there ever was one.” p. 211 You don't buy into excitement, you “sell into strength” John Neff on Investing, page 108
The price of most of our dividend-paying stocks went up the day after the Minister's announcement. I multiplied the aggregate number of shares we own by the average price gain in the week ending November 4 2006: we are up tens of thousands of dollars…Medicine sans Frontieres will receive more from us this year.There will be increased demand for high yield common and perhaps even lower yield, higher dividend growth stocks (Derek DeCloet on the front page Report on Business, Saturday November 4 2006 'Flaherty's trust bombshell will open investors' eyes to dividend growth“.)
Are you not glad we were in dividend growth common stock first? Finally we get our reward for resisting the temptation of income trusts. It was not easy. A lot of people wanted me to follow trusts. I'm glad now that I held firm. As Lynne Truss says in Eat Shoots and Leaves, “It felt fantastic. It was like that bit in Crocodile Dundee where our rugged hero scoffs at the switchblade of his would-be-mugger, and produces a foot-long weapon of his own, “Call that a knife? THAT's a KNIFE.” 105
On 'The National' of November 2, one financial advisor suggested preferred stocks and bonds as the alternatives to income trusts. Can you imagine! I've never bought a preferred (it's telling that preferreds are not mentioned in Jarislowsky's The Investment Zoo). Nor do I own bonds and certainly not mutual funds which lost big time last week (IGM was down, of course). Imagine using income trusts to gee up the return of dividend funds.
I'm continue to hold my common stocks which have growing dividends (and yields) and plan buy more common stock when they are value priced. I use to my yield charts and percent difference from Graham's price number of assess value. (BCE was 26% above its Graham price)
The income tax on Canadian dividends from 'real' common stock is a pittance for investors with incomes of roughly $60,000 and less, . “In the wake of the Trust Bust, these stocks reached new highs yesterday: BMO, BNS, CM, ENB, FTS,GWO, MFC, POW,PWF and RY”*. Three cheers for good old fashioned common stocks!!! *E-mail from a subscriber Friday morning, November 3.
Did I hear that the income tax treatment on distributions from income trusts will be changing? I don't really give a hoot. I don't own any income trusts:-) Trusts themselves will be paying tax before too long, so distributions will have to be reduced: that's why prices fell. What a brave minister. I never thought they would do it…but like everything else, if something gets out of hand…they have to close the loophole.
