Needs information on income trusts
Question: What are Income Trust Units and how do they work? – A.W.D.
There are several types of income trusts, and it would take too much space to explain them in full detail. They also are known by some other names, including royalty trusts. Here’s a capsule summary.
An ordinary corporation may pay some of its profits in dividends but it is under no obligation to do so and often profits are retained in the business or invested in new equipment, acquisitions, etc. Corporations are taxed on their profits and dividends are paid from after-tax net income.
An income trust, by contrast, pays most its profits to its shareholders (unitholders) and also passes on any tax advantages, such as depreciation write-offs, to investors. This results in cash payments that are much higher than you would expect to receive from a stock. Many income trusts are currently producing cash-on-cash yields in the 10% to 15% range. Normally, the higher the yield, the greater the risk in the security.
Some income trusts are very stable and have a good record of maintaining distributions. Real estate investment trusts (REITs) are an example. Othe operate in highly volatile businesses, such as energy, and distributions to unitholders can vary significantly from year to year.
This is a rapidly-expanding investment field in Canada and anyone interested in participating should seek professional advice. You may wish to subscribe to our new e-mail newsletter, The Income Investor, which deals specifically with income trusts and other types of income-oriented securities. You can find details at http://www.buildingwealth.ca/promotion/50plusproducts.htm
This is a very complex field, so learn as much as you can before taking action. – G.P.