Time to sort through all the emails in my inbox and select some of your questions for reply.
Q - I have been holding Brookfield Infrastructure and Brookfield Renewable Partners for a while, collecting the dividend along the way. I had imagined these as long term holds but lately I wonder if it’s time to go elsewhere. Any advice? – Charles D.
A – These are Brookfield limited partnerships based in Bermuda, but their businesses are very different so let’s look at each separately.
Brookfield Infrastructure Partners (BIP.UN-T) invests in a wide range of core industries, mainly in the Americas, Europe, and Australia. These include railroads, ports, cell towers, toll roads, etc.
On Nov. 3, the partnership released third quarter results. Brookfield reported net income of US$413-million (72 US cents per unit) for the three-month period to Sept. 30. That compared to a loss of US$5-million (12 US cents per unit) in the prior year.
Funds from operations (FFO) was US$422-million for the quarter, reflecting a 16-per-cent increase compared with the same period last year. Results were supported by strong growth from the base business and the initial contribution from Inter Pipeline Ltd., which was acquired earlier this year. The results exclude the impact of the sale of various assets, which raised almost US$2-billion of net proceeds for Brookfield Infrastructure this year.
Although there have been pullbacks along the way, the overall trend for BIP.UN this year has been up. The units closed in Toronto on Monday at $73.87, a little off their high for the year. The yield is 3.5 per cent.
A rising market trend and a decent yield suggest this is not a stock to sell at this time.
Brookfield Renewable Partners (BEP.UN-T) is in the green energy business. Its primary focus is on hydro power, but it also owns wind farms and solar projects.
Green energy stocks performed well in 2020, partly in anticipation of incoming President Joe Biden’s commitment to combatting climate change and the anticipation that Congress would approve legislation providing financial support for corporations and consumers tied to environmental initiatives.
However, investors pushed the green energy stocks too far too fast, and almost all have suffered losses this year. BEP.UN opened the year at about $62 per unit but was trading at $44.80 on Dec. 20. The yield is 3.4 per cent.
These numbers make BEP more problematic. The one-year trend line is down, although there has been a small uptick recently. The yield is decent but there are many other more stable stocks that offer a better return. I still like BEP as a long-term hold, but if you’re uncomfortable with it, sell and move on. – G.P.
Q - Can you please explain why Firm Capital has been trending down from over $15 a month ago to the low $14s today. Should I ditch it now after I bought when you mentioned it a while ago? – B. Yuen
A – Actually, I first recommended Firm Capital (FC-T) in January 2004 at $11.30 in my Income Investor newsletter. Over the years it has almost always traded in a range from $10-15. The reason to own it is the steady income in provides, not for capital gains potential.
The price is down from the $15 range because of a combination of factors, the most important of which is rising interest rates, which will move higher in 2022 as the Federal Reserve Board and, presumably, the Bank of Canada move to fight inflation. There is nothing wrong with the fundamental strength of the company.
I have owned the stock ever since I recommended it and still do. If cash flow is your primary objective, you should just ignore the day-to-day price fluctuations and keep collecting the monthly dividend.
On the other hand, if you’re investing for capital gains you never should have bought this stork in the first place, as I have always tried to make clear. If that’s the case, by all means “ditch it”. But if you are looking for steady, predictable income, buy more when the price drops. – G.P.
Can’t buy mutual funds
Q - As a non-resident investor I was surprised to find myself barred from ownership of Canadian mutual funds. What is the rationale behind this rule? What would be your advice on how to diversify risk in a portfolio now dominated by a small number of individual stocks? – Robert F.
A - The rationale is that mutual fund companies aren’t licenced to sell to non-Canadian investors. Neither are U.S. companies licenced to sell in Canada, which is why many big U.S. companies have opened Canadian branches, with their own suite of funds. Examples include Fidelity and Invesco.
The best way to diversify your portfolio in your situation is to buy ETFs, which trade on stock exchanges and are not restricted by the citizenship of an investor. – G.P.
Return of Capital
Q - If an ETF indicates ROC as part of its distribution, is that always bad? Bad meaning that the ETF’s distribution represents return of investment, rather than gains achieved by the fund. Thank you in advance for your response. – Ernst W.
A – ROC is short for return of capital and it’s actually a desirable form of income distribution in that it is not taxed in the year received. Instead, your cost base is adjusted to reflect the amount of the ROC. The net effect is that you’ll have to pay more tax when you eventually sell, but at the capital gains rate.
Some securities are deliberately structured to generate a high percentage of ROC income. They include real estate investment trusts (REITs), limited partnerships, and some mutual funds.
Here’s how it works. Let’s assume you buy 100 shares of a security at $10 in a non-registered account. At year-end, your distributions include $1 in ROC. You deduct that from your original purchase price, giving you an adjusted cost base of $9 per share. If you then were to sell at $12, you’d pay tax at the capital gains rate on $3 per share ($12-$9 = $3), instead of $2 per share based on the original amount you paid. Note that only half of capital gains are taxable.
ROC is not desirable if the net asset value of your security declines, because that means you are being paid with your own money and taxed on the payout. But in the context of a REIT or similar security, it’s a tax-efficient way to receive income. – G.P.
Dealing with an inheritance
Q - My mother recently passed away and her assets are currently invested in very conservative stocks. Can I take my inheritance in stocks, or must the stocks be sold and the proceeds distributed? If I have a choice, what are the major tax implications of stocks or cash? – Frank S.
A –My sympathies on the loss of your mother. The executor of the estate would normally liquidate the assets and use the proceeds to pay off all debts including final taxes. The remainder is distributed among the beneficiaries in accordance with your mother’s will.
There is nothing to stop you from requesting that your share of the estate be remitted in the form of stocks. If that can be done without compromising the other beneficiaries, the executor should try to accommodate you. However, if the stocks are held in a registered plan and you are not the plan’s designated beneficiary, that could be a problem. I suggest you request a meeting with the executor to explore the options.
As far as taxes are concerned, there are no death duties in Canada, whether an inheritance is received in stocks or cash. But if your mother has an RRSP or RRIF, the assets will be deemed to have taken into income at the time of death and taxed at her marginal rate – which will be very high if she had significant savings. – G.P.
If you have any money questions you’d like answer, send them to firstname.lastname@example.org and write Globe Question in the subject line. I can’t guarantee a personal response but I’ll answer as many questions as possible in this space.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.