Borrow to invest in EnerVest?

Q – Do you think borrowing money at prime to invest in the EnerVest income trust is a good idea? I think this fund is well diversified and pays 12% yearly on a monthly basis. – R.L.

A – EnerVest holds a portfolio of income trusts funds. Current distributions are running at the rate of $0.07 per unit monthly, or $0.84 annualized. Based on a recent trading price of $7.10, that works out to a cash-on-cash projected distribution of 11.8%, annualized.

On the surface, borrowing at prime to buy units looks like an attractive idea. The interest on the loan will be tax deductible so, at the current prime rate of 4.5%, your effective annual interest charge will only be around 2.7%, if you are in a 40% tax bracket. Moreover, some of the income from EnerVest will be tax-advantaged.

However, there are a few points to consider before making a decision:

1) Interest rates may rise, increasing the effective cost of your loan.

2) The payments from the trust are not guaranteed. The track record in this regard is good, but this is not a bond and the assets of the trust are subject to market forces.

3) Thmarket price of EnerVest will fluctuate, and is likely to fall if interest rates rise.

4) If you decide you want to proceed, investigate alternative choices as well to be sure that EverVest is the right one for you. Consult a financial advisor for similar options. Citadel Diversified Investment Trust, which is recommended in our Internet Wealth Builder newsletter, is one possibility. – G.P.