Buying Canadian Income Funds For Passive Income (and Financial Freedom)
Yesterday, I bought some more Canadian Income Funds, also called Royalty Trusts or Canroys. As I mentioned before, I recently refinanced a property and I managed to pull some money out (totally tax-free!).
Rather than spend the money on an SUV or a big-screen TV, I opted to divide the money into 3 parts. The first 1/3rd went towards replenishing my emergency fund which was drawn down by vacancies in my rental properties. The second 1/3rd went towards future investments in summer just in case there’s a pullback in the stock market and the last 1/3rd went to building up my passive cash-flow.
Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth. That’s because I feel its a meaningless number. If I had a $1 million dollar net worth and it only generated $25,000 a year in income (like Cd’s did a few years ago) that’s pretty sad. On the other hand, if I owned a $1,000,000 car-wash that generated $125,000 that’s pretty significant.
My goal is to generate passive income. Its your passive income that provides financial independence, not your net worth. If you have $3,000/month through various passive income streams, you’ve got your basic food and shelter taken care of and you won’t starve if you lose your job. That is my short term goal. My longer term goal is generate $10,000/month in passive income so I can travel the world without worrying (or working).
I’m currently not even at 50% of my $3,000/month goal so at least 1/3rd of all future investments must take me towards that goal. That’s why I bought some Canroys yesterday. I bought Harvest Energy (HTE) and Canetic Resources(CNE). They generate revenue from oil and gas production and refining. The noteworthy part is that they payout around 12% dividend per year. Since the selling of oil and gas leads to a depletion of reserves, its important that they keep some of their revenue for future acquisition of new properties and for drilling new wells. Both of them have a payout ratio of under 80% which isn’t bad considering they have proven and probable reserve lifespans of 9.5 years.
There are Canroys with lifespans of 6-7 years and payout ratios of 95% that yield 15% but I’m suspicious of their longterm viability. These two seem like pretty safe bets. If oil prices rise there’s a chance of increased payout and also capital appreciation. If not, I’m still getting my 12% yield.
The only issue I have is that the Canadian Government takes its 15% tax straight out of my account. But even considering for that, my yield is still just over 10%. Besides, I get a US tax credit for that amount, so its not a total loss.
I also bought some units in Prism Income Fund(QSR.UN) which owns and operates nearly 500 fast-food franchises in Canada (Taco Bell, KFC, Long John Silver and Pizza Hut). Their stock has been pretty stable compared to other Canroys following the whole Taxation issue. Its also currently yielding 12% and while I don’t expect much capital appreciation, I don’t expect it to drop in value or its dividend to fluctuate with the price of oil and gas.
So now I’m one step closer to my goal of $3,000 in passive income. This brings my total passive income from Canroys to $300 per month. I’m also getting $300 from a loan to a developer at 2% per month. And I average around $300/month from my various online ventures. (Even though my online ventures aren’t passive, I enjoy pursuing them and I have geographic independence. Thats why I’m counting it).I’m also making around $150/month from my direct oil and gas drilling investments, so I’m almost 1/3rd of the way to my goal!
When I get the money back from the developer, it’ll be redeployed at a much lower rate. But I expect the cash flow from the direct oil drilling program to increase enough to cover this short-fall.
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June 29th, 2007 at 12:54 am
You seem to like Geographical Independence…..
June 29th, 2007 at 5:12 am
So why not post passive income instead of net worth?
I got into the whole blogging thing via the NetWorthIQ website. I feel the number is meaningful though it is not the only meaningful number – the composition in terms of retirement account/non-retirement account is important as is the investment performance/skill of the person in question. Just like GDP is a meaningful number for a country but not the only number needed to get an idea of the true standard of living in a country – other variables like literacy, democracy, life expectancy are also important. The latter tend to correlate with GDP but not perfectly.
June 29th, 2007 at 9:42 am
well I just did!
if i get around to updating the template, i’ll put it up.
June 29th, 2007 at 12:00 pm
“My longer term goal is generate $10,000/month in passive income so I can travel the world without worrying (or working).”
What I nice goal to make. You seem to be on track so far
June 29th, 2007 at 6:52 pm
You’ve gotta have a dream, coz if you don’t have a dream, how you gonna make your dreams come true?
July 1st, 2007 at 5:27 am
I can’t say I agree more with this post… passive income is the key to living a stress free life… trick is managing this goal with your significant other
July 2nd, 2007 at 7:17 pm
Trying to generate more passive income in the short term, as well as the long term are great goals to have. I look forward to reading more about how you plan on achieving that!
P.S. Thanks for visiting my site. I added you to my blogroll.
August 13th, 2007 at 6:02 pm
Thanks for the ideas about Canadian income funds. My ultimate goal is $250,000 of annual passive income. Mostly that’ll come from rental real estate, but I also plan to have a portion of it come from fixed income (which will also serve as a reserve fund for the real estate). Up till now I had really only planned on using my taxable US bond fund for fixed income, but I do realize there are other options. I have some things to consider!
October 14th, 2007 at 6:18 pm
All I have is a question.How do you consider rental property income passive(repairs,collecting rent.evictions,etc.)??
October 15th, 2007 at 12:40 am
well nothing is really passive is it? do your stock or mutual funds sell themselves or does your portfolio diversify itself?
how much work “you’re” willing to do defines passive.
For me, collecting rent checks in the mail and talking to a property manager on the phone constitutes passive.
November 4th, 2007 at 2:38 pm
You’ll either have to invest time or money and time=money. If you don’t invest either then I would question the morality of such income.
Any asset price should reflect today’s costs of future earnings. F=P*(1+%)^T. When this gets out of balance from the background, I would consider looking for reasons.
Don’t delay traveling and seeing the world, do it while you can.
November 13th, 2007 at 9:19 pm
Wonderer,
I don’t think L.O.D. said he was making an income without investing any money, so I am unclear as to your comment on the morality of income. Besides, if your stance were true, then one’s income gained from any government-sponsored Social Security program would be immoral. Actually, many people do believe such government-sponsored transfer payment programs are immoral, or at least in the case of the USA given its Federal (instead of State) transfer payment programs, are unconstitutional (and therefore, anti-American). Alas, that’s subject matter for another day…
What I wanted to point out for L.O.D.’s readers here is that the statement, “Any asset price should reflect today’s costs of future earnings. F=P*(1+%)^T.” is incorrect.
An asset’s value (NOT price – which is determined by supply and demand) typically reflects the present value of the asset’s future after-tax free cash flows, discounted at the opportunity cost of capital (often, but not always, the yield-to-market rate of the “risk-free” 10-year U.S. treasury bond).
Also, the formula shown in the statement is incorrect. One should be solving for present value, not future value as shown. Also, one should be using a formula applicable to multiple cash flows over time, not just one single cash flow as indicated in the formula shown.
The correct formulas for this problem can be found on Wikipedia here: http://en.wikipedia.org/wiki/Time_value_of_money
Look for the formulas discussing the present value of an annuity. Pick the formula that best represents the asset’s ability to generate future free cash flows — e.g., a constant stream of cash flows, a growing stream of cash flows, cash flows into perpetuity, etc.
Also, don’t forget about inflation. For that you’ll need to reduce your nominal discount rate by an expected rate of inflation to get your real discount rate. The resulting calculated PV is an estimate of the value of the asset in constant year currency and reflects the real benefit of the asset today. The question then becomes, What price would you be willing to pay today for that real benefit?
The key point here is that price does NOT equal value. Value is determined by a rational and objective person using fundamental data, reasonable assumptions, and established mathematical models (as discussed above) to determine the asset’s economic worth. Price is determined by the supply of and demand for like assets in a market inhabited by human beings exhibiting often irrational and conformist behaviors. Knowing the difference between value and price is critical to building wealth by investing in cash flow-generating assets. Just ask Warren Buffett!
Finally, I cannot agree more with Wonderer that you should never delay seeing the world. Spend some time outside your home country — you’ll be the better for it.
Logan.
November 18th, 2007 at 12:01 pm
I generate income on the stock market. My top investments have been in south America, inthe prefered shares of electricity and water companies. I also find the thai smaller cap stocks a valuable fishing ground for passive income. Telecoms have also rung in high divis.
I have dipped into European banking stocks recently, but, at the moment, the principal is dropping, and into oil tanker stocks.
Bought some US REITS, and lost money due to the falling dollar and the subprime crisis. There are definately opportunities here for the brave. I got my fingers burnt, so wont be buying more for the moment, but if things stabilise, I might dip in for thejuicy yields.
My monthly dividend income varies between a few hundred dollars and a few thousand dollars. I am not yet a millionaire.
December 3rd, 2007 at 8:46 pm
If you take the Schedule D deduction for the 15% tax you get a deduction! Not a TAX Credit.
A credit goes straight against the tax.
A deduction’s value depends on your tax bracket.
Even the complicated IRS 1116 is same thing.
There are few tax CREDITS, many tax decutions like church,
gifts to charity etc
December 3rd, 2007 at 9:32 pm
no, I’m pretty sure its a tax credit.
and gifts to charity aren’t tax credits. I think you’re confusing something else.
January 20th, 2008 at 6:54 pm
I agree that passive income from dividends is the way to go. If you buy stocks which increase their payments consistently year after year, you get a stable and predictable stream of income, which would eventually cover your expenses and provide you with a peace of mind in case you lose your job or stress over whether you have saved enough for retirement.
January 30th, 2008 at 8:43 pm
Is it me or is CNE a money-losing company? Maybe I’m misinterpreting.
http://moneycentral.msn.com/companyreport?Symbol=CNE
If it is losing money, I would expect the company to cut dividends.
February 1st, 2008 at 11:57 pm
its not a money losing company. infact CNE is being acquired by another Canroy.
February 5th, 2008 at 9:48 am
I’ve been following Canadian Income Trusts for a while now and 2 other names you might want to consider are CWI.UN and CLC.UN. Unlike the oil & gas names their distributions are very stable (although somewhat lower)and in recession resistant area. CWI.UN rents hot water heaters while CLC.UN provides laboratory testing diagnostics.
ADI
http://americandividendinvestor.blogspot.com
February 8th, 2008 at 4:48 pm
FYI,
The income trusts will start paying a 40% tax starting in 2011. I am a Canadian that own some and no one is 100% what will happen once that start… FYI Reit’s have been exempted.
February 11th, 2008 at 3:49 pm
It’s true that most REITs will be exempted however, NOT ALL of them. In order to be exempt there are a few requirements that must be met ie-certain amount of their income must come from Canadian sources, a certain % of revenue must be from rents and mortgages and not management fee etc…
ADI
http://americandividendinvestor.blogspot.com
March 12th, 2008 at 4:02 pm
[...] recommend LOD’s philosophy page). The site’s top articles have titles such as Buying Canadian Income Funds For Passive Income (and Financial Freedom), Making $3,000/Month In Passive Income, and Can You Retire On Less Than $3,000 A Month? [...]
March 25th, 2008 at 6:56 am
[...] one’s salary. I have numerous different types of investments like rental properties, stocks, canadian income funds, CDs, foreign currency ETFs as well as owning loans on [...]
May 19th, 2008 at 11:18 am
i stumbled across canadian income trusts 3 years ago…..this is what i own total value 58k pengrowth energy..PGF.un…….advantage energy..AVN.un……..NAL oil and gas…NAE.un………..tree island …………..
…TIL.un….anda fun lil play pays bout 30%….global stratedgy master ….LPV.UN…only have 800bucks in it but ive got my 800 back by now small money only in this one….anyone have any good usa ones like these canadian ones? and why dont financial planners push these?
May 21st, 2008 at 9:49 pm
Dude, I live in the heart of income trusts in Canada and I’ve never once heard them referred to as Canroys… not in the media here, either:)
Funny!
Let me know if you have any questions about any of them… I feel very familiar.
BTW not all income trusts are going to be impacted by the 2011 changes. From the investor’s POV you may not notice any difference at all. But that’s if you’re Canadian; I’m not sure what extra witholdings etc. might apply for you.
June 26th, 2008 at 2:27 pm
I really enjoyed reading about your Canroy’s and ability to earn passive income from them. Some of the oil tankers and shipping companies are also paying some high dividends as well. I have purchased a REIT and will be looking to add some other high income funds soon. Thanks for the good info and hope you reach your target of $10k soon.
July 8th, 2008 at 2:49 pm
I once owned some canadian oil/gas trust. But I found that the dividends are taxed quite heavily. As an American, I got taxed by both Canadian and US governments.
July 8th, 2008 at 2:53 pm
Geoff,
you’re tax accountant should be able to get you a tax credit for the foreign taxes filed. If not, you should fire him!
September 7th, 2008 at 3:40 pm
3,000/month is 3 times of my monthly expense (food, rent, internet,electric)I don’t have a car. If I could make 3,000/month passive income, I would be retire right now.
September 9th, 2008 at 1:08 pm
[...] as a source of passive income. I first learned about Canadian Income Funds, or Royalty Trusts, from Living Off Dividends. These Canroys such as Harvest Energy (HTE) and Pengrowth Energy (PGH) offer a high yielding [...]
September 12th, 2008 at 8:46 am
Ooh, thanks for the tip – I’ll be looking into those canroys once I get my next paycheck. Good luck with your goal; I share the same aspirations as you! Your $3k-and-growing a month gives me hope.
September 23rd, 2008 at 10:27 am
[...] also strengthened against the Loonie in the past 6 weeks, so this has reduced the payout from my Canadian Royalty Funds. But I expect this trend to reverse and the dollar will continue weakening this year. On the other [...]
November 7th, 2008 at 7:10 am
Are those oil and gas dividend or income trust shares oilsand producers? With the current weakness in the price of oil, their margins will be reduced even though one of the ones I follow increased their payout. I owned Baytex Trust which has a very healthy payout which I expect to be cut back some time in the future if the price of oil does not stabilize. If our friends in the middle east manage to keep to price of oil at a suitable level, then the economics of canadian oilsands producers will continue to be very profitable.
November 26th, 2008 at 11:33 pm
“Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth. That’s because I feel its a meaningless number”
I just found this site and am finding a lot of useful information, but this statement doesn’t make much sense. I understand your point is that you should always strive to get the full potential out of your net worth, but this number is far from meaningless. It is useful to readers as it shows how well you are leveraging your assets, and how you are diversifying your assets percentage wise. Using the same investing strategy with 100,000 vs. 1 million, the difference is huge.
November 30th, 2008 at 10:18 am
10,000$ / month? That is outrageous dude. You could easily travel the world with less than half of that.
I think you’re going to be working a lot of extra years for some extra income that will prove unnecessary.
January 22nd, 2009 at 12:17 am
“Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth. That’s because I feel its a meaningless number”
I’m with rob, net worth is a very useful number to discuss. It adds context. It helps form the general impression about how others perceive the answer to the always-present question, “How Much Is Enough”. There aren’t enough stories around showing how people are making this idea work at whatever net worth level they’re at.