Are CANROYs a good investment idea?
One of the more interesting questions I have received from a reader recently was in regard to Canadian Royalty Trusts (CANROYs). These are interesting trusts, some of which (like AAV, HTE and PVX and others) are traded like stocks on the New York Stock Exchange, though most are traded on the Toronto stock exchange. CANROYs consist of oil and natural gas producers. Because they are trusts, the Canadian government hasn't been taxing them (although this will change in 2011 and CANROYs will be taxed as corporations).
They have been interesting to some for the following reasons, as listed by Dividend Detective:
They grabbed dividend investors’ attention because of their high dividend (distribution) payouts. The trusts pay those dividends because they don't have to pay corporate income taxes if they distribute their income to unit holders (shareholders).
Of course, as pointed out above, the whole tax issue is changing. But how are they doing now? Well, because CANROYs are allowed to acquire more properties (unlike U.S. Royalty Trusts, which decline in value with no way of replenishing resources), they can continue to grow. However, changes to royalty proposals, such as the one that would affect Alberta tar sands oil producers, are already causing problems for CANROYs like Canadian Oil Sands (COS.UN.TO) and other major royalty trusts. On the other hand, oil prices continue to rise, meaning that oil producers are profiting more. This could mean good returns in established CANROYs — until 2011 at least.
But oil prices are volatile, and the controversy and attempts by the Canadian government to get more from CANROYs are likely to eat into income before 2011. They are reasonably priced right now, and if you think that they will rebound, now is a good time to get in on CANROYs, since they are down.
Bottom line: CANROYs are a little too volatile for my taste. Their long-term outlook, what with increased taxation from the Canadian government, as well as the fact that they are based on limited resources (that could be replaced by sustainable alternative energy), is not favorable in my opinion. However, if you are looking for a good deal, you might be in luck if CANROYs spike on rising commodity prices. I'd just do my profit-taking before 2011. Also, be aware that some come with interesting tax issues for U.S. investors. Talk to a knowledgeable tax attorney before making your decision, since you will want to know whether the tax implications are worth it.
Disclosure: I am not even considering CANROYs for my portfolio.