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Published: September 29, 2010
Canada has been an income investor's
playscape for decades.
That reputation is mainly thanks to Canadian trusts, which
aren't taxed at the corporate level as long as they pay out the
bulk of
earnings as dividends. That's allowed them to spit out
double-digit yields like clockwork. So many businesses opted for
the trust structure that lawmakers decided to start taxing them
like corporations in 2011.
Does that mean high yields from Canada are history?
Hardly! There's another group of Canadian securities shooting
off tax-advantaged high yields -- I've found some as high 11.5%.
Best of all, conditions for this group look to be on an uptrend.
Canada was one of the first countries to recover from the global
recession. GDP grew +6.1% in the first quarter, nearly all jobs
lost during the recession have been recovered and Canada has
even started raising interest rates thanks to its recovery.
These are good signs for investors in Canadian
REITs (real estate investment trusts).
Yes, just like the United States, Canada has REITs too. But I
doubt you've heard of them before. Canada has about three dozen
REITs in total. Yields average about 8%, but I've seen them
creep upwards of 10% -- even nearly 12% in some cases. That's
what you get when business is booming.
Unlike U.S. real estate, Canada's property market is thriving.
Occupancies average 97.4%, according to a June report by
credit rating agency DBRS. Moreover, Canadian REITs are
taking full advantage of low interest rates (even though they
are now rising slightly) to refinance existing debt at
historically low rates. For example, Riocan (TSX: REI.UN),
Canada's largest REIT, recently reduced a
mortgage on one of its properties by about -1.8% when it
secured a five-year mortgage at 4.2%, a record low for the
trust. Management estimates the savings from refinancing its
debt this year should equate to about $0.02 per share.
These factors have helped Canada's largest
REITs return nearly +18% so far this year, according to the S&P/TSX
Capped REIT Index. By contrast, the S&P 500 is up only +5%.
But most of us aren't investing in Canada's REITs. Why aren't we
flooding the sector with cash?
The answer is twofold. First is the market's sheer size.
Canada's property market is very small compared to the U.S. And
as I told you before, only about three dozen REITS are publicly
traded.
But I think the biggest reason is that Canadian REITs trade
mostly on the Toronto Stock Exchange (TSX) -- and that scares
off stateside investors. But here's the good news: It doesn't
matter. Most U.S. brokers can fill orders on the TSX. Fidelity,
E*Trade and Schwab all offer access.
Action to Take --> Buying
Canadian shares can actually be as simple as buying on the U.S.
exchanges. At worst, it might take an extra phone call to your
broker.
One thing you do have to watch --
currency rates. Canadian REITs trade and pay dividends in
Canadian dollars. But remember that those amounts will be
converted back to U.S. dollars if you're an American investor.
This feature has actually been good news since about the start
of 2009; the Canadian dollar has gained about +15% during that
time. An appreciating Canadian dollar makes dividends and share
prices worth more to U.S. investors, making Canadian REITs a
solid way to play a weak U.S. dollar, too.
I mentioned above that Canadian REITs
yield up to 11.5%. That comes courtesy of Scott's (TSX:
SRQ.UN). As my High-Yield International readers know, this
REIT isn't my favorite, but it certainly pays a mouth-watering
monthly yield.
-- Carla Pasternak
Editor
High-Yield Investing,
High-Yield International |
