Two Must-Have Canadian Income Trusts for High Dividend Diversification

INTRODUCTION: A TELECOMMUNCATIONS AND HEALTHCARE SELECTION FOR DIVERSIFICATION

There aren't many stocks in the healthcare and communications sectors that offer dividends that are reliable, high, AND in a dollar hedge. So it's exciting when you find them, because they give you some diversification into these sectors.

The two sectors share similarities.

Due to steady demand in both sectors, well run firms in these fields can prosper even in bad times as a result of steady demand.

The key phrase here is "well run." While there is demand, few firms in either field have greatly prospered.

Telecom firms have seen their traditional cash cow land line monopoly businesses eroded by cable, wireless and internet competition, and only those telecoms that could grow in these competitive areas have been able to prosper.

Health care firms typically must be very efficient at processing lots of paperwork correctly (or suffer payment delays) and coping with fixed reimbursement rates.

Note: As I hope to detail in another post, I am not a believer in this rally. Thus it's a treacherous time to take new stock positions, especially given the recent run up of these and other recommendations in this series. Do not buy above the limits stated below, and even then take only partial positions unless we revisit the March lows.

Bell Aliant Regional Communications Income Fund

Bell Aliant Regional Communications Income Fund (BLIAF.PK). Given the dubious nature of the current rally and the very thin daily volume traded on this stock (and thus extra potential for volatility), buy only on dips below 19. Yield over 11%.

BLIAF had strong Q1 results. Like any telecom that is prospering in the era of increased competition to their landline businesses, they're growing income from Internet and other advanced services to more than compensate for the steady decline in revenues from traditional local and long distance landline phone operations.

Highlights include:

• Conservative Payout Ratio: Distributable cash flow again easily covered distributions with a payout ratio of 83 percent, despite a 13 percent increase in capital spending to upgrade the network for faster services.
• Tighter Business Focus, Improved Cash Position: The trust also completed the sale of its Defense oriented unit, focusing operations and boosting the balance sheet with proceeds of CAD16 million now, to be followed by CAD8.5 million later in the year.
• Cost Cutting: Resulting in rising margins during the quarter even as overall revenue slipped 1.2 percent. Internet revenue grew 10.8 percent on 8.6 percent customer growth and a 5.4 percent increase in revenue per user, as the trust’s data business continued to grow.
• No Debt Pressure: By nature telecoms need to make big capex investments and thus depend on a cooperative debt market. That's not the case now. Fortunately, the firm has no significant debt due until 2011, so they have time for things to improve.

In sum, this is a sound business that’s prospering in the toughest market in generations. That's a reassuring sign that management is on top of its game and will continue to be able to exploit further opportunities in broadband and wireless services.

CML Healthcare Income Fund

CML Healthcare Income Fund (CMHIF.PK). Yield over 7%. Buy under 11. Yield over 7%.

While Canada's health care system is far more socialized than that of the US, it's still possible for well managed, efficient companies and trusts to profit in Canada’s health care system. In fact, given Canada's traditionally more paternal government commitment to funding the system, business is actually even steadier than in the US, making healthcare one of the most reliable sectors.

Reliable high yields in healthcare are very hard to find, and this is the best I've seen. It provides testing services and has begun expanding into the US. They reported first quarter revenue growth of 38.6 percent and double-digit cash flow growth, which in turn drove its payout ratio down to a comfortable 84.6 percent.

The keys to success:

• Successful US expansion,
• Steady income from current operations
• Rate increases at the Canadian operations
• New cost controls

These trends should continue to show up on the bottom line for the rest of the year, even as the trust boosts efficiency by digitizing its information network. A veteran player in Canada’s national medical industry, CML is well positioned to profit richly from President Obama’s moves to increase the government role in the US. As an established player, it has the financial strength to make that happen as opportunities arise.

CONCLUSION

My only reservations about buying these firms are:

• Both are above my buy limits as of the time of this writing.
• Both are thinly traded and thus potentially volatile.
• There is plenty of overall market risk given both.
• The likely fraudulent and one-time nature of the Q1 profits that ignited this rally.
• The lack of fundamental (versus technical unwinding of short positions) underlying justification for the rally's continuation.

Thus keep these in mind when their prices come in.

Disclosure: The author owns shares in the above companies.

Comments

[YoYoMama:]

This may be a Mickey Mouse question, but are your portfolio positions in CGIFF and ATPWF listed as such? Or did TD purchase the foreign ordinary? What are the brokerage fees for TDAmeritrade? Can you purchase with your online account, or do you have to use a broker?


On May 13 10:38 AM arthurofchicago wrote:

> YoYo
>
> FYI - I was able to purchase CGIFF & ATPWF without trouble
> with TDAmeritrade. I have pending buy orders for several other CanRoys.
> I was able to place a buy order for ATGFF and assume it would have
> executed. Don't forget the "TD" stands for Toronto Dominion Bank,
> so they should be handle trades on the Toronto Exchange.
>
> Good luck

May 13 11:12 AM

[Cliff Wachtel:]

I've traded Canadian stocks via pink sheets online with both Fidelity and Tdameritrade. Better if you have an online broker that allows you to trade directly on the Toronto exchange, since execution is supposed to be better (faster, smaller spreads between bid and ask prices). I assume there are other online brokers that also will deal with these. Don't give up these stocks are worth it, though take no more than a partial position given the doubtful nature of the current rally. Cliff


On May 13 10:20 AM YoYoMama wrote:

> Cliff,
>
> Your readers may have a difficult time trading these Canadian trusts.
> I know I attempted to purchase ATGFF within my Zecco.com account,
> and it was flatly refused, as they would not purchase "foreign ordinaries".
>
>
> I already had a different account at Scottrade, and was told by customer
> service that I could trade these entities with them. So I switched
> accounts.
>
> However, when I attempted to purchase a different Canadian trust,
> I still was told I could not purchase the pink sheets entity. Apparently,
> Scottrade , will not trade the pink sheets entity unless there is
> sufficient volume to do so. Otherwise, they will purchase the underlying
> Toronto entity and symbol. Given that I know little about the Toronto
> exchange and how this will affect my portfolio, I did not pull the
> trigger until I had more information.
>
> What are the differences between owning the pink sheets symbol vs.
> the Canadian entity it represents? Any advice on dealing with my
> brokerage house on this issue? And are others having the same issues
> I am?
>
> I very much am on board with your plan. But I am wondering if your
> plan is truly implementable by your U.S. readers. I personally am
> encountering a great deal of difficulty, as the volume of the pink
> sheets entities are an issue, and I'm wondering if you can address
> this concern. I frankly am a little discouraged, as the whole reason
> I switched accounts was in an attempt to follow your plan.
>
> Thanks.

May 13 11:38 AM

[Cliff Wachtel:]

One cannot indiscriminantly apply the same payout ratio across all industries. Firms with more reliable revenue streams can allow themselves higher payout ratios. For example, given the volatility in energy prices, I like to see payout ratios below 65% for energy producer income trusts. On the other hand, electric power trusts or energy infrastructure trusts that get most of their revenue from fixed long term contracts can have higher payout ratios.

Ratios for financial statement analysis are good tools, but they are only tools, not a substitute for critical thinking.

Admittedly, you could argue that "reasonable" or "moderate risk" would have been a more precise term than "conservative." I'd acknowledge that. Cliff


On May 13 07:23 AM Dividend Growth Investor wrote:

> Cliff,
>
> I enjoyed your article. While you bring some valuable points to the
> discussion, I wouldn't call an 83% dividend payout ratio " conservative".
>
>
> I was wondering when did you start investing in the highest yielding
> stocks?
>

May 13 11:46 AM

[Cliff Wachtel:]

Oh, in answer to your last question, over 20 years. FYI the goal isn't to pick the highest yields, but those that offer the best risk/reward profile. I'll take a bit more risk for a lot more reward. As noted before, stocks with low yields are still essentially a bet on their price appreciation, they are are not income investments (unless, maybe, you have so large a portfolio that 1% real returns leaves you with a meaningful income).

While it's true that higher yield should, and usually does, indicate higher risk, there are exceptions. My job is to find the positive exceptions, and warn about the negative ones. Heck, a few years back GM was considered a blue chip and paid accordingly.


On May 13 07:23 AM Dividend Growth Investor wrote:

> Cliff,
>
> I enjoyed your article. While you bring some valuable points to the
> discussion, I wouldn't call an 83% dividend payout ratio " conservative".
>
>
> I was wondering when did you start investing in the highest yielding
> stocks?
>

May 13 11:53 AM

[YoYoMama:]

Well, switching accounts to TDAmeritrade just for the priviledge of buying these Canadian trusts is problematic from the standpoint of fees.

Having the trade cost $3.00 more per trade (Scottrade $7, TD Ameritrade $9.99) is not a problem if all I was trading in my IRA were the Canadian trusts. But for me to switch my entire account over for this priviledge means my fee costs are raised over 30 PERCENT for EVERY TRADE. When you attempting to actively manage your portfolio in this challenging environment, that 30% really eats into your total yield.

If I then prefer to hold these Candian trusts in my Scottrade account, I'm then forced to use the broker, which will cost me $27.00. It will take several years of dividends to make up that fee. If I take seriously how the fees affect my yield, I'm forced to take a full position in a Canadian trust, which is not a good idea in this environment.

The only real way to make this worthwhile for me (and probably a lot of your readers) is to open an IRA or other account at TDAmeritrade which is dedicated solely for the purpose of holding Canadian trusts. That's the only way to make the fee structure not work against you.

Unfortunately, since I don't have thousands sitting in the bank to open a 2nd IRA, and I'm too young to take out any funds from my current IRA, I'm stuck.

I would like to see more full disclosure from you on how to invest in the foreign ordinaries and the challenges your readers will face. The problems I have been having were never fully been addressed in any of your columns. Now, I've switched my account away from FREE trades to follow your advice, only to now have my costs be $7.00 per trade, and I STILL cannot implement your plan because no matter how you slice it, the way my current IRA is structured I can't make it work due to the fee structure!!!

On May 13 11:38 AM Cliff Wachtel wrote:

> I've traded Canadian stocks via pink sheets online with both Fidelity
> and Tdameritrade. Better if you have an online broker that allows
> you to trade directly on the Toronto exchange, since execution is
> supposed to be better (faster, smaller spreads between bid and ask
> prices). I assume there are other online brokers that also will deal
> with these. Don't give up these stocks are worth it, though take
> no more than a partial position given the doubtful nature of the
> current rally. Cliff

May 13 12:59 PM

[Michael D.:]

Agree to all that chasing yield is risky.

Also, please be forewarned that the legislation making companies eligible for the 'Income Trust' structure (flowing income directly to unitholders) will be adjusted in the next few years, and may negatively reduce yields.

May 13 01:24 PM

[Cliff Wachtel:]

Thanks for the assist, another helpful comment. Fidelity will also work, though I've found TD overall more cooperative and customer friendly, and also they automatically sweep cash into a money mkt. Cliff


On May 13 10:38 AM arthurofchicago wrote:

> YoYo
>
> FYI - I was able to purchase CGIFF & ATPWF without trouble with
> TDAmeritrade. I have pending buy orders for several other CanRoys.
> I was able to place a buy order for ATGFF and assume it would have
> executed. Don't forget the "TD" stands for Toronto Dominion Bank,
> so they should be handle trades on the Toronto Exchange.
>
> Good luck

May 14 02:20 AM

[Cliff Wachtel:]

I've always just used the otc symbols you mentioned. It would be worth asking tdamtd if they can let you buy Directly from the Toronto exchange (tsx), given their Toronto Dominion link as per arthurofchicago. Again, however, may want to see if mkt comes in. These usually follow it. If some really bad news hits and the mkt tanks, their low daily volume makes them prone to sudden drops that can give you some entry points. Consider placing orders a bit above March lows. If things stabilize, take partial positions. You won't go wrong with the stuff you're looking at, even at current prices. Cliff


On May 13 11:12 AM YoYoMama wrote:

> This may be a Mickey Mouse question, but are your portfolio positions
> in CGIFF and ATPWF listed as such? Or did TD purchase the foreign
> ordinary? What are the brokerage fees for TDAmeritrade? Can you purchase
> with your online account, or do you have to use a broker?

May 14 02:36 AM

[Cliff Wachtel:]

1. Congrats on your success.
2. How do you define a "fair" dividend? As long as the company can sustain (and ideally) grow it, then why not go for a higher one if your goal is income? If your goal is a mix of income and growth, then the approach of accepting low dividends as a sort of opportunity cost compensation while waiting for a sustained bull market (?) may be justified. To me, betting on a sustained bull market any time soon is not only gambling, it's low probability bet.
3. Have I said something to suggest my understanding of my recommendations was flawed? I welcome any corrections. Having been married to my wife for over 19 years, I take criticism well, and acknowledge I've many faults. Always glad to learn something new from a pro like yourself.

4. Don't tell anyone, but I've also held MO and PM for close to 20 years. I like.

Cliff


On May 13 12:16 PM dividendgrowthinvestor wrote:

> As aperson who is an accountant married toa CPA I appreciate Mr Wachtel's
> well thought out analysis
>
> But as a person who has achieved financial independence solely by
> investing I would like to make an observation
>
> It is better IMO to get a FAIR dividend with plenty of room for growth
> that may be lower that YOU UNDERSTAND( MO JNJ PM KFT etc )
>
> then buying an investment which you do not fully understand which
> is the DEFINITION of gambling
>
> Just my 2 cents .peace
>

May 14 02:47 AM

[Cliff Wachtel:]

Hmm. Very good point. First, I believe these should NOT be in an IRA since you lose the IRS tax credit for the 15% Canadian withholding tax for non-Canadians.

Second, you offer an excellent future blog idea - how non-Canucks can best access the tsx directly. Suggestions, dear readers? I suspect there are easy solutions. Will make inquiries as time permits and publish my findings. The issue should be addressed. Ideally, I'd like to find an online broker that trades on all the major exchanges. They generally don't because each exchange has its own filing/registration/co... procedures, and the online brokers try to run a lean operation.

Third, the commissions are a problem only if you're doing a lot of trading on small positions. If you're not doing lots of trading or taking positions over $5k (and thus getting about $450 if overall yield is 9%) then the fees shouldn't stop you. But you're right to seek a better deal.

Will try to research as time permits. Cliff


On May 13 12:59 PM YoYoMama wrote:

> Well, switching accounts to TDAmeritrade just for the priviledge
> of buying these Canadian trusts is problematic from the standpoint
> of fees.
>
> Having the trade cost $3.00 more per trade (Scottrade $7, TD Ameritrade
> $9.99) is not a problem if all I was trading in my IRA were the Canadian
> trusts. But for me to switch my entire account over for this priviledge
> means my fee costs are raised over 30 PERCENT for EVERY TRADE. When
> you attempting to actively manage your portfolio in this challenging
> environment, that 30% really eats into your total yield.
>
> If I then prefer to hold these Candian trusts in my Scottrade account,
> I'm then forced to use the broker, which will cost me $27.00. It
> will take several years of dividends to make up that fee. If I take
> seriously how the fees affect my yield, I'm forced to take a full
> position in a Canadian trust, which is not a good idea in this environment.
>
>
> The only real way to make this worthwhile for me (and probably a
> lot of your readers) is to open an IRA or other account at TDAmeritrade
> which is dedicated solely for the purpose of holding Canadian trusts.
> That's the only way to make the fee structure not work against you.
>
>
> Unfortunately, since I don't have thousands sitting in the bank to
> open a 2nd IRA, and I'm too young to take out any funds from my current
> IRA, I'm stuck.
>
> I would like to see more full disclosure from you on how to invest
> in the foreign ordinaries and the challenges your readers will face.
> The problems I have been having were never fully been addressed in
> any of your columns. Now, I've switched my account away from FREE
> trades to follow your advice, only to now have my costs be $7.00
> per trade, and I STILL cannot implement your plan because no matter
> how you slice it, the way my current IRA is structured I can't make
> it work due to the fee structure!!!
>
> On May 13 11:38 AM Cliff Wachtel wrote:

May 14 02:58 AM

[arthurofchi...:]

YoYo

My TD account list's as follows:

Atlantic Power Corp Pink OTC Markets Inc:ATPWF

Chemtrade LogisticsPink OTC Markets Inc:CGIFF

Cliff is correct about waiting and setting low buy orders.
CGIFF had a big drop today and I am kicking myself for recently raising my buy order which tripped - I only caught half the drop. Silly me thinking the stock should rise on a nice May 11 report.

FYI IRA accounts get 500 free trades for 30 days. Also, TD will talk to you if you call their 800 number even if you do not have an account. Since I am not trying to day trade I do not mind paying a few extra dollars for a higher level of support. Good luck

May 14 03:04 AM

[arthurofchi...:]

Cliff,

I am buying CanRoy's for my SEP IRA. Even with the 15% up front hit the returns are decent. They still compare favorably with some stateside MLPs but it is neck and neck on as to the pipe line companies. I own a little of both to spread my risk.

If held in a regular taxable account, I would get a rebate on the 15% but then I would owe Uncle on teh income so I see it as a wash.

May 14 03:16 AM

[WhatsTheSto...:]

Don't need to trade them


On May 13 10:20 AM YoYoMama wrote:

> Cliff,
>
> Your readers may have a difficult time trading these Canadian trusts.
> I know I attempted to purchase ATGFF within my Zecco.com account,
> and it was flatly refused, as they would not purchase "foreign ordinaries".
>
>
> I already had a different account at Scottrade, and was told by customer
> service that I could trade these entities with them. So I switched
> accounts.
>
> However, when I attempted to purchase a different Canadian trust,
> I still was told I could not purchase the pink sheets entity. Apparently,
> Scottrade , will not trade the pink sheets entity unless there is
> sufficient volume to do so. Otherwise, they will purchase the underlying
> Toronto entity and symbol. Given that I know little about the Toronto
> exchange and how this will affect my portfolio, I did not pull the
> trigger until I had more information.
>
> What are the differences between owning the pink sheets symbol vs.
> the Canadian entity it represents? Any advice on dealing with my
> brokerage house on this issue? And are others having the same issues
> I am?
>
> I very much am on board with your plan. But I am wondering if your
> plan is truly implementable by your U.S. readers. I personally am
> encountering a great deal of difficulty, as the volume of the pink
> sheets entities are an issue, and I'm wondering if you can address
> this concern. I frankly am a little discouraged, as the whole reason
> I switched accounts was in an attempt to follow your plan.
>
> Thanks.

May 15 03:28 AM

[Cliff Wachtel:]

True, though the companies I'm recommending will continue to produce worthwhile returns, some have even committed to maintaining them. Also ATPWF is NOT an income trust and is thus not subject to the tax change.


On May 13 01:24 PM Michael D. wrote:

> Agree to all that chasing yield is risky.
>
> Also, please be forewarned that the legislation making companies
> eligible for the 'Income Trust' structure (flowing income directly
> to unitholders) will be adjusted in the next few years, and may negatively
> reduce yields.

May 15 09:28 AM

[anarchist:]

Cliff, what is the yield on the dividend paid by ATPWF.PK? When I look at Yahoo finance or MSN money there is not dividend or yield information just a "NA".
Thanks

May 15 10:06 AM

[anarchist:]

Yes, I agree. Lets say you buy 1000 shares of AAV @ 3.41/share and have a pre-Canadian tax yield of 11.7% or $400 (rounded off) so after the Canadian Government takes their 15% pound of flesh you are left with about 340 which is still 9.97%. Maybe I have forgotten something so would appreciate any corrections.


On May 14 03:16 AM arthurofchicago wrote:

> Cliff,
>
> I am buying CanRoy's for my SEP IRA. Even with the 15% up front
> hit the returns are decent. They still compare favorably with some
> stateside MLPs but it is neck and neck on as to the pipe line companies.
> I own a little of both to spread my risk.
>
> If held in a regular taxable account, I would get a rebate on the
> 15% but then I would owe Uncle on teh income so I see it as a wash.

May 16 05:37 PM

[anarchist:]

ok, i see that question was answered.


On May 15 10:06 AM anarchist wrote:

> Cliff, what is the yield on the dividend paid by ATPWF.PK? When
> I look at Yahoo finance or MSN money there is not dividend or yield
> information just a "NA".
> Thanks

May 16 05:43 PM

[anarchist:]

I have signed up to have access to the Toronto Exchange with Interactive Brokers LLC which is an online discount brokerage. I haven't traded on the TSE yet so not sure how well it will work but there are a variety of exchanges available. The fees at Interactive Brokers are the best I have seen (can't quote any as I did that once and the comment disappeared). I have three accounts with IB, two of which I have had for three or four years and have no complaints at all. If you need charts, graphs, star ratings and the likes you won't find much of that information at IB as it's pretty much a no frills operation but executions are fast and accurate in my experience.


On May 14 02:58 AM Cliff Wachtel wrote:

> Hmm. Very good point. First, I believe these should NOT be in an
> IRA since you lose the IRS tax credit for the 15% Canadian withholding
> tax for non-Canadians.
>
> Second, you offer an excellent future blog idea - how non-Canucks
> can best access the tsx directly. Suggestions, dear readers? I suspect
> there are easy solutions. Will make inquiries as time permits and
> publish my findings. The issue should be addressed. Ideally, I'd
> like to find an online broker that trades on all the major exchanges.
> They generally don't because each exchange has its own filing/registration/co...
> procedures, and the online brokers try to run a lean operation.<br/>
>
> Third, the commissions are a problem only if you're doing a lot of
> trading on small positions. If you're not doing lots of trading or
> taking positions over $5k (and thus getting about $450 if overall
> yield is 9%) then the fees shouldn't stop you. But you're right to
> seek a better deal.
>
> Will try to research as time permits. Cliff

May 16 05:55 PM

[Cliff Wachtel:]

Easiest and most reliable way its to go to their website:


www.atlanticpowercorpo...

and look in the left margin for links / info on cash distributions. It shows monthly distributions are $0.0912 CAD per month. Convert it to USD ( as of May 17 its something like USD 0.08489), multiply the result by 12 and divide it by the USD price, currently about USD 7.69. by my calculations its[ 0.08489x 12] / 7.69 = about 13%

hope that helps, cliff


You can get exchange rates at Yahoo Finance: finance.yahoo.com/curr...;to=CAD;amt=1

On May 15 10:06 AM anarchist wrote:

> Cliff, what is the yield on the dividend paid by ATPWF.PK? When I
> look at Yahoo finance or MSN money there is not dividend or yield
> information just a "NA".
> Thanks

May 17 07:34 AM

[Cliff Wachtel:]

thanks, will look into - readers take note! cliff


On May 16 05:55 PM anarchist wrote:

> I have signed up to have access to the Toronto Exchange with Interactive
> Brokers LLC which is an online discount brokerage. I haven't traded
> on the TSE yet so not sure how well it will work but there are a
> variety of exchanges available. The fees at Interactive Brokers are
> the best I have seen (can't quote any as I did that once and the
> comment disappeared). I have three accounts with IB, two of which
> I have had for three or four years and have no complaints at all.
> If you need charts, graphs, star ratings and the likes you won't
> find much of that information at IB as it's pretty much a no frills
> operation but executions are fast and accurate in my experience.
>

May 17 07:36 AM