10 Income Trusts We Don’t Like

Article Excerpt

Income trusts as a group are more speculative than most investors realize. They carry a lot of hidden risk, due to the way they are organized as investments, and to the way they are valued by investors. Share prices of many companies rise in price when they announce plans to convert into income trusts. But that leaves a lot of room for share prices to fall when business conditions weaken. Income trusts are generally set up to hand out most of their cash flow to their investors. However, that often leaves them with no reserves to carry them through a period of slow sales and falling asset values. Meanwhile, all too many investors value income and royalty trusts as if they were low-risk investments whose high distributions were likely to continue indefinitely. When cash flow slows and trusts have to cut or halt distributions, unit prices can collapse. That’s why we generally recommend that investors hold no more that one sixth of their portfolios…

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