All About Income Trusts:  Exploring What These Dynamic Investments Can Do For You!

Recently, a number of clients have asked me to recommend specific products to manage market volatility in our low interest rate environment. Income trusts have become an attractive investment choice for certain investors because they offer diversity and provide high income as well. However, many investors (and the media!) have not properly considered these investments from a risk perspective. Allow me to review income trusts and explain why current economic conditions make this investment attractive.

What is an income trust?

An income trust is a company structured as a trust that owns, manages and maintains a revenue-producing asset. They are generally small-cap holdings paying high dividends. The goal of an income trust is to generate strong cash flow for its owners. Essentially, there are four general types of income trusts: (a) real estate; (b) oil and gas; (c) power and pipelines; and (d) general business. Real estate investment trusts derive income by owning real estate, such as apartments, hotels, commercial buildings, etc. Oil and gas trusts derive income from mature oil and gas properties, while power and pipeline trusts are involved in the transmission or generation of energy. The remaining income trusts fall under the "general business" category. trusts cover any business that generates these substantial cash but has limited opportunity for growth. Specialty income trusts, like all income trusts, can be affected by interest rates and other industry-specific business risks.

Characteristics of income trusts

Investing in income trusts can offer attractive yields and favourable tax treatment when held outside of RRSPs and RRIFS.

Remember, just like businesses, income trust funds are not immune to losses. Carefully consider the following factors when investing in a trust: your own risk tolerance; the future of the trust's business; stability of distributions; expected exhaustion of trust assets; management skill and interest rates. Of course the quality of trusts can vary considerably so be sure to discuss trust opportunities with a professional.

Income trust mutual funds

Purchasing mutual funds that invest in income trusts is a great way to introduce these investments into your portfolio. Each mutual fund maintains a number of complementary trusts, thus reducing the group's overall risk.

If you'd like details on investing in income trust funds, I'm always up for a discussion on the topic. Give me a call today.