Should I sell income trusts?
Income trusts have been dropping in trading value lately, and with the possibility of interest rates rising, is it wise to consider selling and taking a small loss rather than waiting for this sector’s bubble to burst? – J.P.E.
Gordon’s answer: First, stop and ask yourself why you bought the trusts in the first place. Was it for capital gains or steady income? If the answer is income, and the trusts you own are still doing the job, why would you sell them? And what would you replace them with?
Many (but not all) income trusts are interest rate-sensitive. That means their market value will be affected by rate movements, in much the same way as bonds. We have been warning of the likelihood of this happening for several months in my Income Investor newsletter and now we’re at that point.
However, not all trusts are equally affected by rate hikes. REITs are among the most vulnerable, along with pipeline and power trusts. Those least affected are energy trusts (which are more susceptible to fluctuations in oil prices) and trusts which focus on economically-sensitive businesses, like pulp and paper. We have recommended a number of trusts that we feel wi fare well in a rising rate environment in the newsletter.
I think it unlikely that “the bubble will burst”, as you put it. Yes, we will see downward pressure on the income trust sector as rates rise. But the effect of that will be to drive yields higher, which will make the trusts even more attractive to income-seeking investors. Of course, when the cycle turns and rates start to fall again, the opposite effect will be seen – trust prices will rise and yields will fall.
If you are investing for income, my advice is to ignore day-to-day or even month-to-month price movements. As long as you are satisfied with the cash flow you are receiving and the trust remains sound, consider it a long-term hold. If you want to actively trade securities, you would be better off sticking with stocks.