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Income Trusts

Five income picks for the post-trust world Add to ...

The shakeup in income trusts is causing investors to look elsewhere for juicy yields, and no one knows that better than Dan Bastasic.

Late last year, with the clock ticking down toward the new trust tax in 2011, the manager of the Mackenzie Sentinel Income Trust Fund realized he had to switch gears: The fund was re-launched as the Mackenzie Sentinel Registered Strategic Income Fund, giving him the flexibility to invest in a wide range of income securities, including common shares and corporate bonds.

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Where should income-seeking investors look now? We asked Mr. Bastasic, who also manages the Mackenzie Sentinel Strategic Income Class Fund, to discuss his top income picks.



EMERA INC.

Dividend yield: 4.5 per cent

The company: Emera owns a $5.4-billion portfolio of electricity generation and transmission assets, including regulated utilities Nova Scotia Power Inc. and Bangor-Hydro Electric Company in Maine. It also owns electricity assets in the Caribbean and natural gas pipelines, wind and tidal power projects in North America.

Why he likes it: Emera gives investors a nice mix of offence and defence, throwing off solid cash flows from its utility businesses while capitalizing on growth opportunities. It's been a bastion of stability in a rocky market, hiking its dividend twice in the past year. "They've invested their capital a whole lot more aggressively and efficiently over the last few years," he said.



H&R REIT

Distribution yield: 5 per cent

The company: H&R operates a diversified portfolio of office, industrial and retail properties with a book value of about $5-billion.

Why he likes it: With financing issues resolved for The Bow office tower in Calgary, H&R plans to steadily raise its distribution over the next two years. Yet its projected payout ratio - at about 70 per cent - is among the lowest in the REIT sector. "I think the distribution is very, very safe given the fact that they're such a low distributor relative to their cash flow," he said. What's more, H&R - like many REITs - expects to be exempt from the new trust tax in 2011.



BCE INC.

Dividend yield: 5.6 per cent

The company: BCE is Canada's largest communications company, with extensive landline, wireless, satellite TV and high-speed Internet operations.



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Why he likes it: Three words: free cash flow. Mr. Bastasic started buying BCE at less than $21 shortly after its leveraged buyout fell apart in 2008, and he kept on buying even as the price rose. The company has hiked its dividend three times in the last 16 months, and with expected free cash of $2-billion to $2.2-billion in 2010, "I think there's the potential for more dividend increases and share buybacks," he said.



CALPINE CORP. 2017 BONDS

Coupon: 7.25 per cent

Price: 94.00

S&P credit rating: B+

The company: Houston-based Calpine operates 75 natural gas-fired and geothermal power plants that generate enough electricity for 24 million U.S. households.

Why he likes it: Calpine emerged from Chapter 11 in 2008 after cutting jobs and reorganizing its debt. Despite its rocky past, its high-yield bonds are a good bet because: 1) The company has hedged much of its production; 2) Its modern plants make it less vulnerable to potential environmental regulation; 3) In a worst-case scenario, bondholders would recover at least 90 cents on the dollar thanks to its high-value assets. But Mr. Bastasic is betting the economy will improve and Calpine's discounted bonds, with a yield-to-maturity of 8.36 per cent, will deliver a nice capital gain.



ALTAGAS INCOME TRUST

Distribution yield: 7.2 per cent (projected)

The company: AltaGas is engaged in natural gas gathering, processing, transmission distribution and storage. It also operates wind, hydro, geothermal and gas-fired electricity plants.

Why he likes it: The bad news is that AltaGas plans to cut its distribution by 39 per cent to $1.32 annually when it converts to a dividend-paying corporation on July 1. The good news? Based on the current stock price, the shares will still yield more than 7 per cent. But don't expect the yield to stay that high forever: Once the uncertainty surrounding 2011 fades, he figures investors will snap up converted trusts like AltaGas, pushing prices up and yields down.

Follow on Twitter: @johnheinzl

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