Thursday, May 24, 2007

Income Trusts - Park Your Money Investments

A New Breed of Dividend Paying Companies featured a stock that failed to live up to my theory as to why dividend stocks tend to do better through market corrections -- that investors looking for dividends look for the highest paying dividends.

For the next few years in Canada earnings from income trusts are tax exempt if they are paid out as dividends. Some of these income trusts pay out an amazing dividend and have been overlooked by the market.

Income Trust Trader (ITT) has put together a list of what they call their Top 30 - Projected 1-Year Total Return. They project up to 175% return on some of these trusts, and even the lowest they project a 90% return.

So, I decided to have a quick look at these, as well as a few others that look promising. In the chart is today's price, the annual dividend, the dividend yield, the one year projected return on the ITT recommended stocks, and my calculation, which is purely math done with strong assumptions. I did not include any income trusts on their list currently paying under 7%.

Symbol
Price
Dividend
Yield ITT Projection My Calculation*
VNG.UN 5.55 1.02 18.38% N/A 148%
MPX.UN 8.29 1.28 15.38% 125% 108%
PGF.UN 20.09 3.00 14.93% N/A 102%
HTE.UN 31.32 4.56 14.56% N/A 97%
BSD.UN 9.80 1.40 14.29% 95% 93%
ESN.UN 7.09 1.00 14.07% 90% 90%
DOM.UN .87 .12 13.79% 99% 86%
CNE.UN 16.89 2.28 13.50% N/A 82%
CDI.UN 10.25 1.35 13.17% 96% 78%
AVN.UN 13.79 2.28 13.05% N/A 76%
FNA.UN 6.56 .85 12.96% 175% 75%
PVE.UN 12.58 1.44 11.45% N/A 55%
CEU.UN 8.60 .95 11.05% 140% 49%
RIG.UN 7.33 .80 10.97% 130% 48%
SPF.UN 14.79 1.56 10.55% 95% 42%
GDI.UN 10.80 1.08 10.00% 125% 35%
BDI.UN 10.45 1.00 9.57% 98% 29%
CJT.UN 12.81 1.16 9.03% 98% 22%
TRK.UN 11.23 1.00 8.90% 98% 20%
ICE.UN 11.59 1.00 8.63% 94% 16%
FDG.UN 30.60 2.60 8.50% 105% 15%
VOX.UN 13.25 1.10 8.30% 125% 12%
MTL.UN 22.05 1.80 8.16% 93% 10%
PEY.UN 20.75 1.68 8.10% N/A 9%
PGX.UN 15.25 1.20 7.87% 91% 6%
FIG.UN 16.75 1.28 7.62% 90% 3%
SSI.UN 19.10 1.44 7.54% 98% 2%
PKI.UN 16.39 1.16 7.08% 105% -4%
*The assumptions I've made is that these stocks will price themselves to an 8% dividend within a year, the dividend will remain constant and that these companies can all support the level of dividend they are paying -- none of that nonsense stuff like with "the new breed" company.

The formula I used is:
(Price*Yield/0.08 + Dividend)/Price - 1
The Price*Yield/0.08 gives the price the stock would be if investors priced it so the dividend yield would be 8%. Over the year you would also get the dividend, so that is added on. Dividing by Price gives what percent of the starting price the new price is. Subtracting 1 is taking 100% off for the original price of the stock.

So, for the first one, 5.55*.1838/.08 gives $12.75. Add the $1.02 dividend and you get 13.77. Divide by the 5.55 and you get 2.48 or the new price is 248% of the start price. Taking 1 off the 2.48 gives 1.48 or 148% gain.

The calculation I did was without consideration of the fundamentals behind the companies. Some may be forced to reduce their dividend and some may increase their dividend. Current price and dividend are the only two criteria used in my calculation and would hardly be considered due diligence, or something to bet the life savings on. Looking a combination of current dividend yield, my calculation, and ITT's projection gives a good start for stocks that could be worth holding.

Canadian income trusts also act as a currency hedge.

I picked 8% as a dividend yield. Once companies are taxed, you can expect the dividend to decline by 40%, or what ever tax rate the company ends up paying. That would bring the dividends down to about 5%, which is in line with reasonable dividend paying companies.

Examples of dividend yield of some companies:
  • NTE - 7%
  • QMAR - 4.9%
  • HBC - 3.7%
  • APSE - 2.9%
  • LYO - 2.5%
  • INTC - 2%
  • TFX - 1.7%
  • RCL - 1.4%
  • GG - 0.8%

3 comments:

Peter Chen said...

Hi Deborah,

I had a hard time trying to get to comment. Had to try many times and hope what I am going to comment on is really what I originally planned.

I think the reason why I am here is to thank you for leaving a comment in my post Why I changed the title of this blog and to let you know I have responded to your comment. Hope there is no problem posting this comment.

Peter (Blog*Star 2006 and 2007)
Blogger Tips and Tricks

NonyMous said...

Hi Deborah,
Thanks for visiting...i have posted a reply in response to your comment regarding Aurelian !!

Jerry said...

Hey!

I just came back from South America. :) I haven't had time to update my blog yet, give me some time.