The Tycoon Report

Canadian Royalty Trust, Not Just for Royalty

Friday, October 20, 2006 | Teeka Tiwari

Okey spadokey, here we are above 12,000 (or right near it) on the DOW! Whoo Hoo! Party time, right? Yes and no. The good news is that the rally had broadened significantly (the NYSE BP has risen quite smartly to 64%) from two weeks ago lending more credence to this overall bull move. The bad news is that the DOW, NASDAQ & S&P 500 are waaaaaaay overbought!

For the last few months we’ve been seeing rallies in the indexes but underperformance in the general market. Don’t be surprised to see the divergence go the other way. Meaning that we could very well see the DOW, NASDAQ & S&P all correct while the larger market advances.

There are several groups right now that after three years of horrible underperformance are starting to rotate back into favor. It would be unfair to members of my premium service pointandprofit.com to divulge them here, but, needless to say, on the next big down draught we get in the market, there will be some exciting buying opportunities IF you are in the right groups.

Last week, I touched upon some dividend plays in the utilities sector. It seems that thousands of you are hungry for more ideas in this area. We were swarmed with emails from Tycoon Report readers anxious for more information on dividend paying stocks. One particular area that was asked about was the Canadian Royalty Trusts.

For those of you who don’t know what they are, let me explain. A Canadian Royalty Trust (also known as a CANROY) is a Canadian version of a US REIT. But instead of investing in real estate, they invest in oil and gas wells and pay out the vast majority of their profits as dividends to their unit holders.

These trusts have historically paid out very hefty dividends in the 9%-20% range. The Canadian government taxes the dividend to the tune of 15%, but as a US citizen, your CPA can file for a partial refund of the tax. (DISCLAIMER: I’m about as far away from being a CPA as you can get. Consult your accounting professional to see if these trusts make sense for you.)

The other “fly in the ointment” of CANROY’s is that technically they are not corporations; they are trusts and, in theory, unit holders have unlimited liability. Is it likely that a unit holder would ever have to face that situation? No, it is generally agreed that that would be an unlikely scenario, but it’s a risk you need to be aware of before investing in one of these. Once again, talk to your tax professional.

Now I’m not a yield guy, but I know how to interpret a chart and tell whether something looks good technically. I examined dozens of CANROY’s and only found two that met my stringent buy requirements. That doesn’t mean that these two stocks are going to the moon. It means that of all the CANROY’s I analyzed, these two stocks were the strongest technically.

As I wrote last week, this stuff is out of my comfort zone and not my main focus, but there are some very basic rules that even I (a died in the wool growth guy!) know about and would like to share with you.

In a dividend paying stock you don’t want volatility!

You want price stability above all else because our dividend money is usually our “safe” money. The capital gains on an equity dividend portfolio are nice when it happens but don’t count on it.

Don’t be a growth buyer in drag!

I’ve seen too many so-called dividend income buyers really be stealth growth buyers instead. You wouldn’t take reckless growth bets with your “safe” money, so stop being a “stealth growth” investor under the guise of “safe dividend” investor!

Don’t put all your eggs in one basket!

Incredibly trite sounding, I know, but good advice nonetheless. I’ve seen too many investors fall in love with a stock’s mammoth dividend and get overconcentrated only to see their holding take huge hits when bad news hit the stock. The key to a good dividend portfolio is diversification. Spread your investments around because the “spaghetti” will hit the fan on some of your dividend stocks, period. For the most part, these will be short term events that will pass; being diversified mitigates part of this risk and lets you sleep at night, too.

Baytex Energy Trust (BTE)

Baytex maintains interests in oil, natural gas liquids and natural gas in Alberta. 60% of their business is driven by heavy oil with proven and probable reserves of 139.7 million of BOE (barrels of oil equivalent.) The security has been in a solid uptrend since 2003, but so have many other energy stocks. What’s different about this one is that even with the recent devastation of the energy sector, BTE stands like a stone pillar in Rome, solidly above its longterm P&F bullish support line.

You can tell a lot about people from how they handle extreme adversity; the same is true for securities. While the rest of the CANROY’s were falling like summer wheat underneath the unrelenting market scythe, BTE declined but never collapsed. Technically speaking, this is the type of behavior we want to see (both from investments and true friends!) Matched with its almost 9% dividend, this has all the hallmarks of a solid longterm dividend winner.

Provident Energy Trust (PVX)

Provident is also based out of Alberta and owns interests in oil and gas operations in Alberta and Saskatchewan. They have proven and probable reserves of 104.9 million barrels of oil equivalent.

This one is a little different from BTE in that relative to the overall market and to its peers, it has underperformed, but on an absolute basis the stock has been EXTERMELY stable.

So the relative performance numbers have become skewed because the stock has traded in a very narrow range. This is exactly the kind of action we want from a pure play dividend security. PVX has been in a solid uptrend since 2001 and remains above its long term bullish support line and the best part is that it pays a very meaty 10.64% dividend!

Enjoy your weekend!




Teeka Tiwari
Chief Investment Officer
ETF Master Trader