How do income trusts differ?
Most U.S. income trusts hold royalty interests in producing oil and gas reserves, but they do not buy other assets. As assets are depleted, distributions fall. Most Canadian trusts continue to purchase assets and grow. They focus mainly on oil and natural gas production, making them highly sensitive to price fluctuations. “If oil and gas prices stay high, that’s good,” says S&P credit analyst Michelle Dathorne. “But if they revert substantially, distributions could go down, and that needs to be factored in by investors.” What impact will rising interest rates have on these entities? As yield-oriented investments, they tend to decline when interest rates are rising. Indeed, since mid-April — when rates began their climb — MLPs are off an average of 8.3%, vs. 1.5% for the S&P 500-stock index during the same one-month period. But some argue the drop has created a buying opportunity because entities will be able to raise distributions to more than offset rising rates. “The stocks have be
