Governing over cash distributions is far more difficult than just approving a cash distribution. It requires the Board and Management to consider the financial impact to the organization, both short term and long term, of making that cash distribution. Cash distributions require Board approval, which means, for most trusts; they must meet at least monthly.

We believe that by paying distributions on such a frequent (monthly) basis, Managers and Directors must maintain a very good understanding of the underlying business and its current and potential future financial condition.

We believe that when both management and the directors focus their attention on the cash flow being generated by the business, and then consider on a regular basis the financial impact of making a cash distribution to its equity investors, a high level of financial corporate governance is forced on the organization. Imagine you are sitting on a board of trustees being asked to approve a monthly cash distribution to unitholders. What steps would you take in order to gain sufficient comfort that indeed the trust could afford to make the distribution this month? Now think ahead to next month, and the following months? And what about an increase to the current level of cash distributions? Do not forget the potential personal liability attached to the role of a Director. One thing is likely for sure; you would soon be very focused on many of the aspects of the business. It is a big responsibility.

Now imagine that the trust of whose board you are a member, is considering an acquisition. And to complete this acquisition, the trust required debt and equity funding. And, after the acquisition and financing is completed, cash distributions are expected, on schedule, from an even larger constituent of investors. Trusts leave little room for error or omissions, because the expectation of cash distributions to equity investors is constant. And you can be sure the lenders have done their homework.

When it comes to monitoring the lifeblood of a business, its cash flows, and everything that can impact that cash flow, trustees are forced to have their fingers on the pulse of that business, each and every month. And that, we believe, is a high standard on the corporate governance scale.

In conclusion, we feel that the cash distributions impose better corporate goverenance on companies. Most earnings that are retained on the balance sheet seem to disappear in transactions that are not accretive to the shareholder. In the the long run the capital efficiency of our companies would improve under a regime of “forced” distributions to shareholders.

There is no better example than BCE (Bell Canada) who have a track record of squandering shareholders capital.

It is my belief that todays crisis over Corporate governance has its root cause with taxation. Our tax systems encourage company’s to retain earnings rather then distribute them to shareholders. This is why today’s corporations have such low yields.

Furthermore, retained earnings bloat the balance sheets and theoretically drive share prices higher which in turn make corporate stock options more valuable. This is better for option holders than for shareholders.

I wonder if this is why BCE phoned the finance minister back in 2006 begging to “level the playing field”.

The idea of buying stocks in hopes that they would go up in price
seemed reckless and absurd. Stocks were risky; they might just as
well go down in price as up. And the companies they represented
might go out of business. So stock investors wanted a ‘risk
premium’ — a little extra dividend from stocks, as compared to
bonds, to make up for the risk of losing money.

But in the Great Boom of the last 25 years of the 20th century
changed attitudes. People began to think that the old fuddy
duddies were wrong; the new way to make money was faster and
easier. All you had to do, they said, was to buy stocks…and then
sell them later (when you needed the money for retirement) to some
Greater Fool who would come along at just the right moment, his
pockets bulging with lucre.

The Dow crested in 2000 at 11,722. It dropped as low as
7,286…and now seems to be on a modest rebound. Three years into
a Great Bust, people still believe in the promise of the boom.
They buy stocks at an average P/E that would have made the old-
timers gasp. Investors still believe that someone will come along
to buy them at higher prices. But where will the greater fools
come from?

Foreigners have taken huge losses from their dollar-based assets.
Europeans, for example, are down 25% since the beginning of the
year because of the dollar. And the pool of buyers in the U.S. is
threatened by two things: demography and economics.

The worldwide boom has turned into a worldwide slump. Incomes are
barely rising. And overseas manufacturers are undercutting prices.

Meanwhile, people in the developed countries are getting older. As
the years pass they become less willing to wait for the next fool
to come along, no matter how great he is; they need income.

Not only that, people facing retirement strain the entire boom-
time financing system. Instead of borrowing, spending and
investing, they turn to saving. Believe it or not, savings rates
are edging up — even in America.

Before he joined the unemployed, Paul O’Neill, then U.S. Treasury
Secretary commissioned a study of how much it would cost for the
government to keep its promises to the baby boomers. Now
completed, the Financial Times, had this comment:

“The study’s analysis of future deficits dwarfs previous estimates
of the financial challenge facing Washington. It is roughly
equivalent to 10 times the publicly held national debt, four years
of US economic output or more than 94 per cent of all US household
assets. Alan Greenspan, Federal Reserve chairman, last week
bemoaned what he called Washington’s “deafening” silence about the
future crunch….”

The studiers concluded that an immediate tax increase of 66% is
needed.

The fuddy-duddies would be shocked again. How can you expect a man
to stomach a huge tax increase when he is already up to his neck
in debt and living paycheck to paycheck, he would want to know?

The baby boomers who are buying stocks might pause for a question
too. Where will the greater fools get the money to buy their
stocks? Why will they want to?

This letter will change the way you approach investing in the stock market.

I urge you to come back and read this letter once a month. Furthermore you should pass this letter on to friends and relatives (our web site has the electronic version).

It is simple but powerful.

I want you to take a step back and just think about this question; Why do you invest for retirement?

The answer that you have been bombarded with is something like this;

One must invest and have there money grow so that once they retire they can live off the income from no risk interest paying investments. Your planner probably came up with a fancy work sheet and questionnaire and at the end they tell you based on X% interest you will need $Y when you retire so that you can have an income of $Z per month when you retire. This income is called passive income. If you think about it, that is what we are all in the end trying to achieve.

Passive income is when you work once but continues to get paid over and over again from work you’re no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income. So far so good.

This is the thought pattern I went through back in early 2001. However, this seemed impossible. The market had crashed. I had no Idea how I could save enough from my earned income to eventually build up a nest egg. So, like everyone else we keep chasing the big score on a real estate deals, stock market or even a lottery.

There is no such thing as something for nothing. That is why most of will fail at achieving the big score.

To put it simply, passive income is income that continues to generate money for you even when you have stopped working. Passive Income is financial freedom with real financial security.

Financial freedom does not have to rely on a paycheck for your standard of living. If you are sick, or want to take a vacation, you will still have money coming to you from your investments. This is Passive Income. Passive Income is Freedom. Passive Income is Security.

The earlier you start planning and building your passive income, the earlier you can achieve being financially free. It takes time and effort, especially in the beginning, just like building anything worthwhile does. You build a foundation and gradually build up your passive income from there.

There are many types of passive income such as

· Private business income

· Real estate income

· Residuals on mutual fund sales (This is what financial planners, brokers and the entire financial industry runs on)

· Welfare Income

· Unemployment Insurance Income

· Workers Compensation Income

· Disability Income

· Government Pension Income

· Employer Pension Income

· Registered retirement plan income

· Interest Income

· Royalty Income

· Dividend Income

· Income Trust Income (Our favorite)

When you look at the list above you can see why government social programs are so popular. By the way if you plan your future around passive income from Government you will become bitter and disappointed. By the time you figured out that you have been fleeced it will be too late. Why? Because the passive income they give you will be less in real purchasing power than you think. The problem is that it is so gradual that the unsuspecting public does not see it happen.

How can you build your Passive Income?

The cornerstone of all wealth understands the difference between assets and liabilities. The difference is this: Assets put money IN your pocket. Liabilities take money OUT of your pocket.

A liability is something that takes money out of your pocket.” (Monthly and continuously) Most people think their home, car, and other possessions are assets. But, the truth is that in most cases those things take money out of your pocket. They cost you money. They don’t make you money. Those things are liabilities. They take money OUT of your pocket each month.

An asset is something that puts money in your pocket monthly and continuously. When you have more money coming IN from real assets than you have going OUT to pay for liabilities, you will be financially free. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It’s not knowing the difference that causes most of the financial struggle in the real world.

Most people use their money to buy liabilities whereas the rich use their money to buy assets that pay for their liabilities.

Passive income is when you work once but continues to get paid over and over again from work you’re no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income.

But note the definition of a business!

Owning a business that provides passive income means the business works without you having to be there. You have a business if you can leave it for a year or more and then return to find it more profitable and running better than when you left. But if your business would falter without you then it’s more like a ‘job’ than a business. This is exactly what Canadian Income Trusts are. When you buy an income trust you get all the benefits (and risks) of owning the business directly without you having to work in the business itself. It’s that simple. Wall Street does not (or doesn’t want to) understand this. This is what Warren Buffet does. He owns a bunch of businesses. He has other people running the businesses. At the end of the year he takes all the cash they generated. He only gives it back if they can give him a good reason too. If not he does something else with the cash.

Everyone has income, but not everyone maximizes the use of that income. Of the four income patterns, the one to shoot for is that of the rich. And one myth you can dispose of is “It takes money to make money.” Regardless of your income you can begin to acquire assets that return an income every year — passive income that comes in, rain or shine, whether you work or not. This is money working for you, not you working for money.

Unlike passive income, earned income or linear income requires that you work for your money. You are basically exchanging your time and effort for money. You get paid when you work. The moment you stop working, you don’t get paid.

The rich incorporate their assets and are able to: Earn, Spend and Pay Taxes on what is left.

The poor and middle class work at a job and must: Earn, Pay Taxes and then Spend what is left.

When you own a Canadian Income Trust the underlying business earns the cash, sends the cash to you without any corporate or personal tax, you then spend or invest or split or leverage the income then you pay tax on what is left.

Only 4% will actually achieve freedom of choice or financial freedom, and a mere one per cent actually achieve his dream for true wealth. This means that only 5% of people are able to provide for themselves when they retire. Are you currently positioned to become one of the 5%?

The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them. The rich don’t work for money; they have their money work for them.

We have given you a lot to think about. Remember, we have nothing to sell you here. Instead of listening to the media and all the experts just think about this on your own. Your gut will tell you that we are right.

Remember, as Warren Buffet said if you are a poker game and you cannot figure out who is the patsy then guess what…your the patsy.

The surest way to success is through the power of compounding and the steady stream of income. When you reinvest the income, the results are incredible. If you fail to reinvest your dividends, you loose out on vast sums of money. 

Furthermore, if you make a poorly timed investment (paying too much) then time and compounding will correct your error. To illustrate this point I would like to give a real life personal example. When I made the decision in May 2001 to switch my investment strategy into income investing, I rushed into two ill-timed investments. I purchased Pengrowth Energy Trust (PGF.UN-TSX and PGH-NYSE) at $20 per unit. I was naive and did not research what I was investing in. I did not realize I bought the units at the peak. One month after I bought the units the price of oil & gas collapsed and my unit price and distributions collapsed almost 40%. However, I put my Pengrowth on a DRIP (Dividend Reinvestment Plan) and I am happy to report that as of today I am now breakeven (even though the unit price is trading just over $15). Meanwhile, Pengrowth is now paying me $0.25 per month per unit and I have 30% more units then I started with. This is still a 15% return based on my original $20 purchase price. 

My other poor investment was NCE Petrofund (NCF.UN-TSX, NCN-AMEX) which I also bought at CDN$20 per unit. I am still not break even but at the present pace of distribution of $0.18 per month I figure to be break even in 6-9 months. 

Looking back I am very happy with my ill-timed investment in Pengrowth and NCE Petrofund. At the time I sold Canada’s premiere industrial Company-Bombardier at $22 (recent close of $3.83 and most likely will not reach $22 in my lifetime) and TD Bank at $41 (recent close of $35) to buy Pengrowth and NCE. I guess it was not such an ill-timed investment after all.

He goes on to say;

“Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.”

And finally

“But there are two catches in the compounding process. The first is obvious — compounding may involve sacrifice (you can’t spend it and still save it). Second, compounding is boring — b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating.”

This excerpt is the key to riches and wealth using Canadian income trusts. These trusts pay dividends every month, month after month. If you reinvest these dividends then voila…..compounding!

Its so simple that you will wonder why you never though of this before! Income trusts pay you every month. If you re-invest the dividends of a trust then the magical effect of compounding will kick in. After a few years you will notice that your passive income level is begining to reach significant levels. Conventional stocks say buy me now and maybe in the future I will give you back more money then you started. Well income trusts give you the cash every month so even if your stock price is the same 10 years from now you still have a decent total return.

There is a way to hold gold and precious metals related investments and get paid while you wait. I have been buying a closed end ETF on the TSX that trades with the symbol MMP.UN. It normally trades at a 15% premium to NAV (Net Asset Value) but in April they issued a warrant offering which has caused its units to drop significantly. These warrants expire on July 23, 2010. The fund last traded (May 7, 2010) at $7.78 per unit but has a fully diluted Net Asset Value of $8.09 at the close of trading on May 7, 2010. The manager pays a $1.20 per year cash distribution ($0.10 per month) resulting in a yield of 15.4%. The yield is expected to be paid from realized capital gains on its holdings.

As long as precious metals and mining stocks are in a secular bull market this funds payouts are sustainable. However, it is very volatile.

Please conduct your own due diligence.

The way to make money in stocks, said the old-timers, was to buy
solid companies that paid good dividends. You make money by
reinvesting the dividends, thus letting the new money breed with
the old. Over time, you’d get an expanding population of dollars.

The idea of buying stocks in hopes that they would go up in price
seemed reckless and absurd. Stocks were risky; they might just as
well go down in price as up. And the companies they represented
might go out of business. So stock investors wanted a ‘risk
premium’ — a little extra dividend from stocks, as compared to
bonds, to make up for the risk of losing money.

But in the Great Boom of the last 25 years of the 20th century
changed attitudes. People began to think that the old fuddy
duddies were wrong; the new way to make money was faster and
easier. All you had to do, they said, was to buy stocks…and then
sell them later (when you needed the money for retirement) to some
Greater Fool who would come along at just the right moment, his
pockets bulging with lucre.

Foreigners have taken huge losses from their dollar-based assets.
Europeans, for example, are down 25% since the beginning of the
year because of the dollar. And the pool of buyers in the U.S. is
threatened by two things: demography and economics.

The worldwide boom has turned into a worldwide slump. Incomes are
barely rising. And overseas manufacturers are undercutting prices.

Meanwhile, people in the developed countries are getting older. As
the years pass they become less willing to wait for the next fool
to come along, no matter how great he is; they need income.

Not only that, people facing retirement strain the entire boom-
time financing system. Instead of borrowing, spending and
investing, they turn to saving. Believe it or not, savings rates
are edging up — even in America.

Before he joined the unemployed, Paul O’Neill, then U.S. Treasury
Secretary commissioned a study of how much it would cost for the
government to keep its promises to the baby boomers. Now
completed, the Financial Times, had this comment:

“The study’s analysis of future deficits dwarfs previous estimates
of the financial challenge facing Washington. It is roughly
equivalent to 10 times the publicly held national debt, four years
of US economic output or more than 94 per cent of all US household
assets. Alan Greenspan, Federal Reserve chairman, last week
bemoaned what he called Washington’s “deafening” silence about the
future crunch….”

The studiers concluded that an immediate tax increase of 66% is
needed.

The fuddy-duddies would be shocked again. How can you expect a man
to stomach a huge tax increase when he is already up to his neck
in debt and living paycheck to paycheck, he would want to know?

The baby boomers who are buying stocks might pause for a question
too. Where will the greater fools get the money to buy their
stocks? Why will they want to?

True investing requires a planned holding period of at least one year although in many cases you may plan to hold the stock indefinitely for many years.

A planned holding period of less than one year is an operation in pure speculation or gambling, rather than investing.

An acceptable company for investment should have a high probability of making a positive return and only a very small probability of incurring a significant loss if held for several years.

Returns on a stock will come from: 1. Dividends collected over the holding period and 2. The (hoped for) capital gains on ultimate sale of the stock.

The capital gain is fueled by two things, first the growth in earnings. For example, if a stock is bought at a P/E of 12 and its earnings double over a five-year period, then the stock will yield a capital gain of 100% if the P/E remains at 12.

The second driver of the capital gain or loss is the change in the P/E ratio. If you buy a stock with a P/E of 12 and the P/E changes by 50% to 18, over any period of time then this yields a 50% capital gain, assuming earnings are unchanged.

The P/E is fueled by investor outlook for earnings growth and the general market sentiment. Changes in the P/E account for most day-to-day stock volatility.

But, ultimately over longer periods of time earnings growth will determine the capital gain since earnings growth produces capital gains at a constant P/E and is also the main driver of changes in the P/E.

Therefore, investors should be very concerned about the expected growth in earnings per share (”EPS”).

Growth in EPS is the buoyancy force that drives up the value of a stock. Your goal should be to buy companies with strong EPS growth potential AND MPORTANTLY to buy them at prices that reflect a lower EPS growth. For example, if a stock price is implicitly pricing in 20% EPS growth, then you can expect to lose money if the EPS ultimate grows at “only” 15%. You must seek to buy stocks that will grow EPS at a higher rate than the growth that you are implicitly paying for when you buy the stock. This is a fundamental concept that most investors (and even most advisors) simply do not understand. You are ahead of the game if you understand this.

Any dividends and growth in dividends are also buoyancy forces that drive stock values up.

The required rate of return on investment is a gravitational force that pulls stock values down.

Investors require a return on investment. If you require a 5% return on your investment then you should be willing to pay up to $7.84 today for a guaranteed payment of $10.00 five years from now. However, if you require a 10% return (perhaps because you have alternative uses for the money that will return 10%) then you would now be willing to pay no more than $6.21 today for that same guaranteed $10.00 payment in five years. Your higher required return has acted as a gravitational force pulling down the value of the investment. The impact of a higher required return becomes very dramatic over longer periods of time.

The result is some interesting and surprising results.

A stock that pays no dividends MUST grow its earnings at least the same rate as your required return. (Assumes no change in the P/E).

If you want to make a 9% return on a non-dividend paying stock, then that company MUST grow EPS at least 9%. Often such a company would brag if earnings grew at 8%, but the fact is that this is a losing investment for you.

Surprisingly, if you must make 9% on your money and the non-dividend paying company can only grow earnings at 8%, then the stock is ultimately worthless to you!

Consider a non-dividend paying company that is selling at $12.00 and earning $1.00 per share and therefore selling at a P/E of 12. Now imagine that the earnings will remain at $1.00 per share for ten years (because management keeps investing the earnings in bad projects). If the P/E stays at 12 then this company will still be selling for $12.00 per share in ten years. If you could forecast all of this and your required rate of return was 9%, what is the value of that share to you today? The surprising answer is that it is worth $5.07 today. That means this stock with zero growth and zero dividends should only be selling at a P/E of 5! And if it is assumed to keep on making a $1.00 per share forever but with no growth and no dividend then in the very long term, it is actually exactly worthless!

Investors should be aware of the concepts of growth as buoyancy force and required return as a gravitational force or at least find an advisor who understands this.