Expert: Steven Taylor - 6/4/2009

Question
I was following the discussion on the book "Money For Nothing and your stocks for free".  I agree with some of your thoughts. I had the same questions ie how much he borrowed or had initially to start this "strategy". I consider myself a "dividend Investor" soley to have a reliable income stream in retirement. I look for quality companies that have excellent history of paying and increasing their divs.  With the reduction in stock prices due to the current economic situation, it is possible to get excellent per centage returns on  your investment.
The big concern for people who follow this path is if they cut their divs.
Having said all this my question regards EP.UN Epcor Power.
Would you say that this is a glorious opportunity - ie currently paying 2.52 on a share price of 14$ ( 18%) or is it too good to be true?
Thanks for any thoughts you are able to share
Paul

Answer
Paul, I am not familiar with that book in particular, but I am very familiar with the strategy of dividend investing for income. You are going about the process exactly in the right way - look for companies that have a long history of paying dividends, that are in stable industries with solid future prospects, and that are unlikely to significantly cut their dividends.

Epcor certainly falls into the first 2 categories - as an electricity generation company, they have a long history of solid cash-flow, provide power under long-term contracts, and are in an industry unlikely to disappear any time soon. You are right to question the current dividend - the market seems to be suggesting that it expects a dividend cut sometime soon. There are some risks in their current operations which may be behind that - they have some biomass plants that require wood waste, but forestry is not exactly a booming market right now, and with lower production, less wood waste for powering Epcor's plants, for instance. There is also the pending regulatory changes in both the US and Canada regarding emissions which may have an effect on certain of their plants. They also have debt coming due, which due to the tight markets, may be difficult to refinance. Of course, the biggest issue may be the coming changes in taxation rates for Unit Trusts and Limited Partnerships in Canada. In 2011, their tax rate will go up, thus likely reducing the amount of cash available for distribution to shareholders. That will have an effect on the unit distribution rates going forward. Right now cash-flow is keeping up with current distribution rates, but the new tax rules will likely change that. The question is, how much will it change? Even if the distributions are cut in half, the yield would still be 9%. That issue requires more analysis, so I suggest you closely review their Annual Report and Annual Information Form.