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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