# Exchange Income Corp (EIF.TO)



## obriast (Jul 22, 2013)

Found this while looking over the holdings of CDZ. What does everyone think of EIF?


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## Synergy (Mar 18, 2013)

I own it. I was looking for a stock to diversify my current holdings. I like the business and it has good dividend. It seems to have been beaten up a little bit over the last few months but the overall consensus from analysts appear to be positive. Looks like a decent entry point.


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## gibor365 (Apr 1, 2011)

nice yield, but P/E at 21.5 and payout at 138% are too high


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## liquidfinance (Jan 28, 2011)

gibor said:


> nice yield, but P/E at 21.5 and payout at 138% are too high



This is a concern. How do they fund it? I havent really looked into EIF but I have seen plenty of high yielding stocks where they seem to be able to maintain a good payout by issuing new stock and debt. I am probably guilty of currently owning a couple like that and I have owned some in the past.


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## Synergy (Mar 18, 2013)

liquidfinance said:


> This is a concern. How do they fund it? I havent really looked into EIF but I have seen plenty of high yielding stocks where they seem to be able to maintain a good payout by issuing new stock and debt. I am probably guilty of currently owning a couple like that and I have owned some in the past.


I'm not sure how they are covering the dividend but the adviser I spoke with had informed me that the dividend was sustainable and that the expected payout ratio was around 70-80% (2013). The dividend history looks decent - growing over time. I'll have to do a little research into the payout ratio, etc.


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## PatInTheHat (May 7, 2012)

liquidfinance said:


> This is a concern. How do they fund it? I havent really looked into EIF but I have seen plenty of high yielding stocks where they seem to be able to maintain a good payout by issuing new stock and debt. I am probably guilty of currently owning a couple like that and I have owned some in the past.


you should be looking at payout ratio as % of free cash, not eps


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## gibor365 (Apr 1, 2011)

PatInTheHat said:


> you should be looking at payout ratio as % of free cash, not eps


OK, and what is AFFO payout?


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## liquidfinance (Jan 28, 2011)

PatInTheHat said:


> you should be looking at payout ratio as % of free cash, not eps



OK. So I buy a business that is paying me all it's free cash flow. That's fantastic. :biggrin: But what happens when that business wants to acquire another business or they need to replace some plant or equipment. :hopelessness:

I have a couple of solutions. They can issue more stock or issue some debt. This can continue for a while but eventually will have to stop. It just depends where we get in on the cycle. It's not all doom and gloom but we must be cautious.


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## My Own Advisor (Sep 24, 2012)

May be OK for small portion of stock portfolio, as in ~1%.


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## Synergy (Mar 18, 2013)

gibor said:


> OK, and what is AFFO payout?


According to the 2012 Annual Report, the free cash flow less maintenance capital expenditures payout ratio was 71% (80% fully diluted), and the 2012 payout ratios for free cash flow was 43% (54% fully diluted).


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## gibor365 (Apr 1, 2011)

My Own Advisor said:


> May be OK for small portion of stock portfolio, as in ~1%.


Yeah, maybe ... considering that it close to 52 weeks low and forward P/E represents 6% discount to its 5-y average....
The stock with similar ticker - ENF has better fundamentals


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## liquidfinance (Jan 28, 2011)

gibor said:


> Yeah, maybe ... considering that it close to 52 weeks low and forward P/E represents 6% discount to its 5-y average....
> The stock with similar ticker - ENF has better fundamentals


Purchased some ENF today. Quite like the look of it. Now I just need to find some money to buy some POT whilst it's going cheap


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## HaroldCrump (Jun 10, 2009)

liquidfinance said:


> Now I just need to find some money to buy some POT whilst it's going cheap


There is this guy that I know....


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## Synergy (Mar 18, 2013)

Q2 is taking a little beating on this stock today. Any thoughts?


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## blin10 (Jun 27, 2011)

their EPS is 1.21 and they pay out 1.68 , hmmm


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## Synergy (Mar 18, 2013)

blin10 said:


> their EPS is 1.21 and they pay out 1.68 , hmmm


Perhaps based on free cash flow. Their free cash flow less maintenance capex payout ratio was 81% (Q2 - 2013), up from 66% in 2012. I would prefer to see that number below 70%.


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## liquidfinance (Jan 28, 2011)

On the basis of these new results I've done a bit of research tonight.

I like the fact that since 2008 the gross profit has increased at a an annualised rate of 28% and the Operational costs have only grown at 20%. It's pleasing to me to see the costs increasing below the rate of the earnings increase. However, for me, this is where the fun stopped. 

What I don't like is that they have been we now have 370% more stock in issue than 2008. That's new stock at a rate of 30% per year. We also have a growth in debt of 509% or annualised at 38.5% 

Book value is around $12.50

So from what I can see the eps doesn't really matter to the company as they can pay the dividend from free cash and then just issue more stock and debt for the capex.

There is no denying the above strategy has worked for them but can it continue to do so?

What really concerns me is the long term liability growth outpacing the profit growth. Then we have all the talk of interest rates rising. If rates rise are they going to issue debt to continue expansion? If not where will the growth come from? 

I think it can serve it's purpose as an income play but with the current threat of rates rising I would like to see the valuation drop as such I'm going to sit on the sidelines for the time being. 

Any thoughts on the above? 

I used the June 1/4 statement for figures with exception of the gross profit figure which I used Morningstar for. On a gross profit per share basis there has been a 7% overall decline. The figure was $8.96 per share in 2008 compared to roughly $8.32 TTM


Please don't base an investment decision on any of my views. Always do your own research.


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## Synergy (Mar 18, 2013)

EIF taking a little beating today - courtesy of the CRA

http://www.newswire.ca/en/story/133...announces-receipt-of-cra-proposal-to-reassess

Buying opportunity?


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## Jon_Snow (May 20, 2009)

Synergy said:


> EIF taking a little beating today - courtesy of the CRA
> 
> http://www.newswire.ca/en/story/133...announces-receipt-of-cra-proposal-to-reassess
> 
> Buying opportunity?


Exited my position this morning. Only ended up losing a couple hundred bucks on an 8k investment. Might very well buy in again down the road.... but I'm not hanging around while the CRA gets its pound of flesh from EIF....


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## james4beach (Nov 15, 2012)

Synergy said:


> I'm not sure how they are covering the dividend but the adviser I spoke with had informed me that the dividend was sustainable


You should not trust advisors for these kinds of claims... they don't know what they're talking about.

Go talk to your advisor again. Ask, "how do you know the dividend is sustainable? show me on paper". Get him to show you his analysis. "Show me your work". Does he pull numbers from the cashflow statement and income statement, with a trend analysis over time, and provide best case/worst case forecasts? Can he provide numerical support for his claim?

Of course he can't, _he's talking out of his ***, because he's a salesman._ Don't trust what he says.


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## OptsyEagle (Nov 29, 2009)

In my opinion, EIF is way too dependant on convertible debentures and one day they will bring the company down. CV always sound wonderful when they are issued, since shareholders always assume their stock is undervalued (if not they would have sold and not be shareholders). So instead of issuing equity at the current price a company issue CVs at a conversion price 30% to 50% higher. Since shareholders always assume the company will do well and the stock will go up (or they would not be shareholders anymore) they applaud this type of financing.

I have no problem with CVs in small quantities, but EIF uses them way too much. When a company needs equity they should issue equity. You see, at some point the company will stumble and you can forget about conversions. Now the question rises to the issue of refinancing. As the market digests this new grave problem, the stock falls more and more. Eventually they refinance with stock (almost always an option in a CV issue) and the shareholders ownership effectively gets transferred to the convertible bond holders, via large dilution of the common stock.

That is EIFs fate, in my opinion, that can be seen from a mile away with one look at their balance sheet.


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## Synergy (Mar 18, 2013)

I sold back in the end of 2013 for a decent gain and was considering buying some shares back within a different account (registered). Was tempted yesterday but considering the CRA issue is somewhat of an unknown, I decided to sit on the sidelines. They appear to have a few things going against them and if interest rates start to creep up this could be the straw that broke the camels back.


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## doctrine (Sep 30, 2011)

I would avoid. There are some great explanations here to as why and how you will potentially lose money. For me, they simply do not have the after tax profits to justify the dividend. I think there is a high likelihood of a cut - the downside is easily another 50% haircut to the stock price, not worth the risk.


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## Synergy (Mar 18, 2013)

For what it's worth - analysts appear to have a different opinion on EIF

"Scotiabank Reiterates “Outperform” Rating for Exchange Income (EIF)". - July 16th, 2014

http://tickerreport.com/banking-fin...es-outperform-rating-for-exchange-income-eif/

"Exchange Income presently has a consensus rating of “Buy” and a consensus target price of C$25.67."


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## My Own Advisor (Sep 24, 2012)

8% yield is not sustainable long-term. Just ask TA.


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## Xoron (Jun 22, 2010)

My Own Advisor said:


> 8% yield is not sustainable long-term. Just ask TA.


Well, it is if the payout ratio is less than 100%. (currently at 130% for EIF.TO)

But, most divs in the 7%+ range are there for a reason. If it was a stable, consistent, predictable dividend with little chance of dropping, then the dividend would get bid down to a more reasonable level (ie the price would go up, dropping the %div)


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## doctrine (Sep 30, 2011)

I've seen plenty of dividends move from 8% to 5% or less due to stock price increases, but in all cases the payout ratio was less than 100% and the companies were capable of increasing earnings without substantial capital investments. On the other hand, I've seen plenty of 8-10% dividends turn into cuts when the payout ratio (of net earnings, not cash flow) was in excess of 100%. I wouldn't risk my capital on EIF in this case, although you never get every call right.


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## Synergy (Mar 18, 2013)

Earnings release - Revenues up 17%, EBITDA up 11%, West Tower division stabilizing, etc. BUT earning per share down 85%. I would have thought the share price would have tanked a little this morning, but up nearly 5% after the conference call?? I listened to the call - seasonal weakness, Q1 typically a weaker quarter, committed to the dividend, free cash flow, etc. but still somewhat surprised by the stock price increase.

http://www.newswire.ca/en/story/135...orts-financial-results-for-first-quarter-2014


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## Synergy (Mar 18, 2013)

Now it's up about 9%? I must be missing something here...


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## Synergy (Mar 18, 2013)

Up another 5% today. Seems like investors where ultimately happy with Q1.


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## OurBigFatWallet (Jan 20, 2014)

Funny, I thought the quarter was decent but not outstanding......


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## Synergy (Mar 18, 2013)

^ up another 4% today! Someone likes it...


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## OurBigFatWallet (Jan 20, 2014)

No complaints here, I just hope it will stay at this level and not drop as fast as it went up. I noticed one analyst raised their target price to $27 so thats a good sign


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## Synergy (Mar 18, 2013)

I'm glad I never bought back into EIF - the stock is really starting to breakdown.


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## dubmac (Jan 9, 2011)

Synergy said:


> I'm glad I never bought back into EIF - the stock is really starting to breakdown.


yield is over 10%. PE around 44....I wonder what's next with this one (dividend cut?).


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## Synergy (Mar 18, 2013)

dubmac said:


> yield is over 10%. PE around 44....I wonder what's next with this one (dividend cut?).


The dividend "appears" to be sustainable, at least for now. Hit a 52 wk low of $14.30 today but ended up closing at $16.80.



> WINNIPEG, Aug. 7, 2014 /CNW/ - Exchange Income Corporation (TSX: EIF) (the "Corporation"), a diversified, acquisition-oriented company focused on opportunities in three sectors (aviation services and equipment, metal manufacturing, and infrastructure services).
> 
> The Corporation is aware of certain media and industry communications, which we believe to be materially inaccurate. The Corporation will release its second quarter 2014 results on Tuesday, August 12th, and we believe this will shed considerable light on the inaccuracy of these reports. Furthermore, the second quarter 2014 report will reiterate that there is no intention to change the current dividend payment and will discuss the strength of the Corporation's financial position to support this decision.


http://www.newswire.ca/en/story/1395626/exchange-income-corporation-responds-to-market-activity


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## My Own Advisor (Sep 24, 2012)

No way yield over 9% is sustainable long-term....


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## Synergy (Mar 18, 2013)

My Own Advisor said:


> No way yield over 9% is sustainable long-term....


Jerome Hass on BNN would agree:



> Primarily held by retail investors. One of his largest short positions. 60% of revenues come from servicing AT&T towers. Another business is related to airlines. He is not excited about either one. Contacts are coming up for renewal in September and they are not profitable. He calls this an absolute short because he thinks it will go down regardless of whether the market goes up or down. Does not think the dividend is safe.


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## hystat (Jun 18, 2010)

Synergy said:


> Jerome Hass on BNN would agree:


I have never looked at stockchase before. Is that typical. They all say buy at $25, don't buy at $15? 
http://www.stockchase.com/company/view/3844/Exchange-Income-referenced-by-Jerome-Hass


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## Synergy (Mar 18, 2013)

hystat said:


> I have never looked at stockchase before. Is that typical. They all say buy at $25, don't buy at $15?
> http://www.stockchase.com/company/view/3844/Exchange-Income-referenced-by-Jerome-Hass


Things change over time, analyst change their opnions, etc. I don't think they all say the same thing as we wouldn't have a market.


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## hystat (Jun 18, 2010)

12% jump yesterday - recent news says they're buying twelve Bombardier CRJ700s and selling US based WesTower assets.


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## Synergy (Mar 18, 2013)

Interesting change of events. It's been one heck of a bumpy ride. I'm still glad I'm watching from the sidelines at this point.


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## hystat (Jun 18, 2010)

Acquired NL based Provincial Airlines (PAL) - sounds sort of like a NL version of Bearskin. 
http://www.exchangeincomecorp.ca/downloads/EIC PAL Transaction Final.pdf


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## agent99 (Sep 11, 2013)

Down 5% today (Jan 6) but no news found. Deal for PAL closed on Jan 2nd. Anyone know what caused drop (other than market malaise?)


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## agent99 (Sep 11, 2013)

Record results posted today. By look of charts it seems these were expected. But news was, I think, after close, so maybe a spike tomorrow? I have quite a bit of EIF!

https://ca.finance.yahoo.com/q?s=EIF.TO



> "Our results for the third quarter on virtually every financial metric are, by a considerable margin, the best in the 11-year history of Exchange," said Mike Pyle CEO of EIC.


Nice to get some GOOD NEWS for a change


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## jargey3000 (Jan 25, 2011)

"so maybe a spike tomorrow?"
looks like a good call 99! showing a nice little bump this afternoon!


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## Malindi (Feb 16, 2015)

Hit the quarter and year numbers out of the park. HUGE spike coming in the next few days. Payout ratio way down (60% from 106% earlier), revenue up 49%. All in all, a killer year and quarter. Massive upgrades from analysts too as of late.


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## 1980z28 (Mar 4, 2010)

any buyers


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## gibor365 (Apr 1, 2011)

1980z28 said:


> any buyers


Just wanted to ask same question  ... I like their business model and it looks a bit undervalued


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## agent99 (Sep 11, 2013)

I first bought EIF at under $14.00. Then some more at $22.00. Also owned one convertible debenture that was called and currently own about $20k of "F" series, bought at about 85.50, now at 102.5. So yes I have been a buyer. Was thinking of adding but already have quite a bit.


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## james4beach (Nov 15, 2012)

gibor365 said:


> Just wanted to ask same question  ... I like their business model and it looks a bit undervalued


gibor from what I understand about you, you're generally a conservative investor. And then occasionally you get into yield chasing and other high risk things like EIF.

EIF is risky. They are absolutely dependent on debt and their ongoing success depends on their ability to raise debt (financing). They raise a huge amount of this debt through things called convertible debentures, which are rather exotic financing vehicles.

An old TD report I have describes this: "Convertible debentures tend not to have credit ratings and can exhibit high risk characteristics compared to traditional debt; therefore, investing in convertible debentures requires a higher tolerance for risk."

That last part is very important. Who is buying these high-risk debentures? Is there appetite for them?

So here's what you must consider. EIF is funding itself through this kind of bond that has no credit rating and is known to be high risk. This fits in a category of high risk/exotic debt along with junk bonds... thus EIF's success really depends on ongoing credit market appetite and tolerance for high risk/exotic debts.

For the last while, certainly for the last few years, markets have had an excellent appetite for this kind of exotic debt. This is a key requirement to EIF doing well. Once this appetite changes, EIF will be unable to keep raising capital at attractive rates, or at all, and can be hit very hard.


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## james4beach (Nov 15, 2012)

gibor I want to remind you of the danger of chasing yield. Here is a past example: everyone was very excited about preferred shares because they had the potential of "stock performance" plus high yield. They were very popular!

Look at CPD now, a popular yield-chasing fund. Since inception in 2007, it's annualized total return (dividends included) is 0.01%. The BMO one, ZPR, has performance since inception of -6.27%.


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## agent99 (Sep 11, 2013)

james4beach said:


> gibor I want to remind you of the danger of chasing yield.


5.8% dividend yield is hardly chasing yield when bank stocks like BMO/BNS are yielding over 4%. But if you are conservative and can accept low bond or GIC yields, you should do that. 

G&M summary for EIF 

Excerpts:



> Net income grew by 20.14%, year over year, to $0.52 per share during the most recently completed quarter. This was among the strongest growth seen by any company in this industry.





> Shares have lost 3.51% over the last five days, but have gained 19.68% over the last year to date. This security has outperformed the S&P TSX by 37.86% during the last year.





> Exchange Income Corp has a net profit margin of 6.01%. This is comparable to other companies in this industry group.





> Of the 11 analysts surveyed by Reuters Estimates that cover Exchange Income Corp, the consensus rating is a buy.


EIF bought a US based cell tower company a few years back and that added to their debt. But they sold the US part of that enabling them to reduce their debt. Perhaps James was reading earlier reviews. 

Right now, I am not buying much in the way of equity. If I bought EIF, I would buy the convertible debentures (F or H series will provide 5.3% interest and trading at 101-102, you can't lose more than a few % on capital invested if held to maturity in 2020/2023). But you DO need to understand these before buying, in particular the call options.


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## My Own Advisor (Sep 24, 2012)

A good payer but not great cash flow for the last 5-years. 

Although a different sector, I prefer REITs for 5%+ yield and more predictable cash flow (income for me eventually). Liking CAR.UN at the moment in particular since home ownership in some major cities is a dream.


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## james4beach (Nov 15, 2012)

I guess I don't have any serious complaints as long as all investors realize how heavily leveraged this investment is. Under the hood, they're running at 2:1 leverage.

If you're comfortable with leverage, wouldn't it be better to diversify and invest in the whole TSX in a leveraged way, like using margin or call options? At least then you get exposure to broad industries, not just one Winnipeg-based company that funds everything with convertible bonds.

I've been tracking call options for this purpose. For example the XIU March 2017 calls I'm tracking are up 30% since March (on intrinsic value only), whereas XIU is up 9%. My point is, if you're making leveraged gambled on equity, then why not go to the more diverse vehicle?


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## agent99 (Sep 11, 2013)

james4beach said:


> I guess I don't have any serious complaints as long as all investors realize how heavily leveraged this investment is. Under the hood, they're running at 2:1 leverage.


Debt/Equity ratio doesn't seem out of line with peers:
2011 0.73
2012 0.78
2013 1.44 (financing turn-around at West Tower - sold Oct 2014)
2014 0.91
2015 1.14

Debt to equity ratio by industries

Excuse me being a bit defensive about this one. It has (on paper) made me a lot of money! But despite analysts BUY ratings, I am not buying more. Overall market looks ready for a downturn. Rather building fixed income (including a few convertible debentures)


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## james4beach (Nov 15, 2012)

I looked at the 2015 report too, hmm, I think you're right: not dramatically leveraged.

But they are highly dependent on low-grade credit markets, kind of like being dependent on junk bond financing. When that dries up, they're going to be in trouble.


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## officematt (Oct 16, 2011)

I have made a bundle on this one through capital appreciation and distributions. Some people can mock one's stock choices, but I am the one laughing at them now...some were even self-professed technical stock wizards lolz.


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## My Own Advisor (Sep 24, 2012)

Certainly if you bought a huge chunk in 2010 - and held - you'd be doing very well by now.


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## agent99 (Sep 11, 2013)

officematt said:


> I have made a bundle on this one through capital appreciation and distributions. Some people can mock one's stock choices, but I am the one laughing at them now...some were even self-professed technical stock wizards lolz.


It was a good choice! 

I can't recall what spurred me to research this stock, but glad I did. I was looking for steady income and liked what I saw. That was over 5 years ago. Total annualized return (CG + Divs) to date has been about 17.5%. Only other stocks I own that are anywhere near are telecoms like BCE. Males up for those energy stocks 

Saw this recently:
http://www.fool.ca/2016/08/16/2-of-the-best-income-stocks-money-can-buy/


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## james4beach (Nov 15, 2012)

I can't argue with holding it in a diversified portfolio of stock picks. But I think you should have an exit plan, which includes watching credit markets for when low-grade debt / convertibles falls out of favour. This is the kind of thing that institutional investors will have a huge advantage over retail investors on.

In other words, nobody's blaming you for joining the ride up, but when it becomes time to jump ship -- institutions will have a huge information advantage over you.


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## agent99 (Sep 11, 2013)

james4beach said:


> , but when it becomes time to jump ship -- institutions will have a huge information advantage over you.


When would that not be the case....


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