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Income 100: Summer 2007

A year ago we helped you target Canada's best income trusts in our second All-Canadian Trust Guide. We ranked the largest trusts in Canada and assigned each a letter grade depending upon how its financial numbers stacked up.

Despite the carnage in the trust sector as a result of new tax rules introduced in late 2006, our picks hit the bulls-eye. Our top-flight trusts - those rated either A or B - gained an average of 11.7% over the past year. That continues a streak of strong performance. Since we started ranking trusts in 2005, our top trusts have gained a total of 44.9%. (Our figures assume you bought the top trusts each year and rolled the profits into the new top trusts in the following year.)

How did we do in comparison to the market? That depends on which benchmark you choose, but we use the Barclays Advantaged S&P/TSX Income Trust Index Fund since it reflects a wide swath of the income trust market. Last year was a difficult one for trusts and the index fund dropped 5.8%. In comparison, our selections added 17.5 percentage points of value. If you go back two years, the Barclay's fund has gained 20.7%. In comparison, our picks added 24.2 percentage points of value.

We hope to keep up the good results but we've decided to revise our approach this year because of the federal government's new tax on trusts. The announcement last fall of the new tax sent the S&P/TSX Income Trust Index plummeting more than 20% even though the tax won't come into effect for more than three years. Trusts have since recovered much of their losses, but investors are bruised and wondering what will happen next. The new tax is likely to shrink the trust sector, which will leave many investors scrambling for good income-yielding investments.

To help you spot opportunities, we decided to add a selection of income-generating stocks to our list this year. Our goal is to rate Canada's largest trusts and stocks based on their ability to provide generous income to investors for a reasonable price. Although we've used some high-powered math to arrive at our ratings, the results can be understood by anyone who's read a report card. The best firms score an A and good ones land a B. Solid but unspectacular candidates slip through with a C. Those that miss the mark go home with a D or even an F.

We are definitely not saying that you can make a fortune by buying every A-rated trust or stock. The market just isn't that predictable. We expect to be off target from time to time. But we do think that A-rated firms deserve your attention because they appear to possess all the necessary ingredients for success. On the other hand, we recommend that you be extra cautious when investing in bottom-of-the-class firms. Perhaps some of these firms possess hidden virtues, but those virtues aren't apparent in their current numbers.

Our grades are based purely on the numbers. We didn't factor in our personal opinions about a sector or a firm. Instead, we scoured the Bloomberg database for detailed financial information. We restricted our ratings to Canada's largest firms by market capitalization. We then trimmed the initial list to remove candidates that have been around for less than a year, or lack the robust financial data we need for our detailed analysis, or don't pay a dividend or distribution. Finally, we doled out marks based on three criteria:

Yield: The more money a firm puts in your pocket, the better. For trusts, we gave high marks to those with the highest distribution yields. (Just remember that pocketing a distribution is not the same as collecting a dividend. For one thing, you may pay more personal taxes on distributions than on Canadian dividends. ) For stocks, we gave top marks to those with high dividend yields and robust dividend growth.

Reliability: We like to see a high yield, but we like it even more when we feel confident that the yield will continue to be paid. To ensure our top-rated trusts are operating with a cushion of safety, we awarded high marks to those that pay out less in distributions than they generate in cash flow. For stocks, we like those with a high ratio of earnings to dividends.

We award additional marks to firms with little debt because balance sheets riddled with debt are riskier than those of less leveraged businesses. We measured each firm's reliance on debt by comparing its ratio of total-debt-to-total-equity against its peers in the same industry.

Value: On the value front we want to be able to buy lots of assets for a low price. So, higher grades went to firms with moderate-to-low price-to-book-value ratios. For trusts, we awarded the highest marks to those trading at low prices in comparison to their cash flow. We measured this a couple of ways, because while we wanted low price-to-cash-flow ratios in an absolute sense, we also wanted a trust's price-to-cash-flow ratio to be low compared to other trusts in the same industry. For stocks, we examined earnings instead of cash flow and gave high marks to stocks with low price-to-earnings ratios.

Putting our marks together we arrived at final grades for each of our 50 trusts and 50 stocks. In total, only 10 earned an A, but 24 managed a solid B. We think both the A and B groups are worth your consideration and we suggest that you don't get too caught up in which firm got an A and which got a B.

You should feel free to aim even further afield in an effort to discover businesses with unique or intangible features that may not be reflected in the hard numbers. To help you, we've rated even more top trusts and income stocks online at There you'll find our grades for the top 100 trusts and the top 100 income stocks. So, take a look if you don't spot your favorites on our list.

Before trading on the basis of our grades, you should make sure that a firm's situation hasn't changed in an important way. Read press releases, regulatory filings, and recent news stories to get up to speed on developments. We recommend limiting any one pick to a small portion of your portfolio. The best way to use our grades is as a starting point for your own research. Like any screening strategy, the purpose of the Income 100 is to help you hit upon a few good ideas that you can then investigate in more detail.

From the Summer 2007 issue

Globe & Mail Articles

 Dividend All-Stars for 2024
 250 Megastars for 2024
 Extreme yields
 The easy way
 Smaller stable dividend
 250 Megastars for 2023
 Champagne portfolio
 Screaming Value
 Blended momentum
 Dividend monster
 Frugal dividend
 Stable dividend
 Speads and recessions
 TSX 60 for value investors
 Looking at 10-year returns
 Watching for a bottom
 Oh, bother!
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

MoneySaver Articles
 2 Graham Stocks for 2018
 2 Stingy Stocks for 2017
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Old MS Articles
 Cdn Top 200 2018
 Cdn Top 200 2017
 Cdn Top 200 2016
 Cdn Top 200 2015
 Cdn Top 200 2014
 Cdn Top 200 2013
 Cdn Top 200 2012
 Cdn Top 200 2011
 Cdn Top 200 2010
 Cdn Top 200 2009
 Cdn Top 200 2008
 Cdn Top 200 2007
 Cdn Top 200 2006
 Cdn Top 200 2005
 US Top 500 2018
 US Top 500 2017
 US Top 500 2016
 US Top 500 2015
 US Top 500 2014
 US Top 500 2013
 US Top 500 2012
 US Top 500 2011
 US Top 500 2010
 US Top 500 2009
 US Top 500 2008
 US Top 500 2007
 US Top 1000 2006
 Dividends 100 2017
 Dividends 100 2016
 Retirement 100 2015
 Retirement 100 2014
 Retirement 100 2013
 Retirement 100 2012
 Retirement 100 2011
 Retirement 100 2010
 Income 100 2009
 Income 100 2008
 Income 100 2007
 Top Trusts 2006
 Top Trusts 2005
 Hot Potato
 Buffett Buys
 Stocks that pay
 Value in the S&P500
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividend growers
 Graham's prescription
 The case for optimism
 Wicked investments
 Simply spectacular
 Small stocks, big profits
 Value that sizzles
 So simple it works
 No assembly required
 Investing by the book
 Invest like the masters
 A simple way to get rich
 Stocks for cannibals
 Car bites dogs
 So easy, so profitable
 Dogs of the Dow
 Money for nothing
 Yield of dreams
 Return of the master

Advisor's Edge Articles
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 Doing the math

Flip Books

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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...