Risk rears its head

I have consistently cautioned that income trusts are not risk-free. It’s extremely important to carefully assess the risk inherent in each security you buy.

Investors were reminded of this fact again recently when General Donlee Income Fund (TSX:GDI.UN) announced a 24% cut in its monthly distribution, from $0.12083 per unit to $0.0917 per unit.

This trust was established to hold the securities of General Donlee Limited, which is a leading diversified manufacturer of precision-machined products for the military, commercial, and general aerospace industries and also is a specialist in the manufacture of precision-machined products for the industrial products and power generation industries. When the fund was launched last year, investors were told to expect an annual yield of 14.5%, based on the original purchase price of $10 a unit.

However, management said in a statement that the rise in the value of the Canadian dollar and general business conditions have forced a re-evaluation of the distribution policy. As a result, the target is “temporarily” being reduced to an 11% yield, based on the IPO price. There will be a return to the 14.5% target only “if and when”onditions improve.

This is not the first time in recent months that an income trust has cut distributions. Earlier this year, Halterm Income Fund (TSX:HAL.UN) suspended distributions entirely after the Halifax-based trust lost two key customers.

These developments should serve as a wake-up call for anyone who thinks that income trusts are just a better-paying type of bond. Take nothing for granted. Choose only top-rated securities and make sure your portfolio is well-diversified. 

Adapted from an article that originally appeared in The Income Investor.