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Yielding to peace of mind

Funds with a steady income stream are attracting more risk-averse investors. Five fund watchers weigh in


How times have changed.

Many investors were once fixated on funds that could deliver spectacular returns. Now, there is another obsession - finding funds that can deliver a steady stream of income.

A low interest-rate environment combined with a shrinking income trust market is sparking demand for yield by aging baby boomers, and also investors with aversion to higher-risk, pure stock funds because of memories of the recent market crash.

Some funds - such as those marketed as the tax-efficient T-Series - may distribute more than the income and capital gains earned in a year to meet targeted payouts. That extra is known as "return of capital" and is not taxable, but reduces the adjusted cost base of the units. (This could mean increased capital gains when units are sold. Capital gains are taxed at half the rate of income.)

We asked several fund watchers to give us ideas on where to find yield among the mutual funds and exchange-traded funds available today:

Phillip Lee,

fund analyst

Morningstar Canada

CI Signature High Income

This global neutral balanced fund, which is run by Eric Bushell, invests in income trusts, preferred equities, bonds and dividend-paying equities. It has a "pretty good track record," a low fee and a monthly payout determined yearly in the context of the economic and investment environment, he said. CI Signature Income & Growth has a similar mandate, but charges a higher fee and pays a bigger trailer commission to advisers.

TD Dividend Growth

This Canadian dividend and income equity fund, which is run by Doug Warwick, pays a quarterly distribution after determining what would be a reasonable payout each year, he said. Investors may not get all the income from dividends as some may go to offset expenses charged to the fund. The top 10 holdings in this stock fund account for three-quarters of the portfolio, he added.

Dan Hallett, director

asset management, HighView Asset Management Inc.

CI Signature Dividend

This Canadian dividend and income fund invests mostly in preferred shares and dividend-paying stock. "You have a skilled manager in Eric Bushell combined with a flexible mandate focused on an inefficient segment of the market - preferred shares - all for a relatively low [management expense ratio]," he said. In the past five years, return of capital has made up no more than one-third of this fund's total distributions, he noted.

Dynamic Dividend

This Canadian dividend and income fund, which has a low MER, invests mainly in dividend-paying stocks and income trusts. "Oscar Belaiche and Jason Gibbs run this fund and have done a solid job," he said. The A series is worthwhile, but "I'm not convinced the T-series funds offer unique tax benefits. And the additional fee of 60 basis points for the T units is not worth paying for, in my opinion." (A basis point is 1/100th of a percentage point.)

Dave Paterson, fund analyst, D.A. Paterson & Associates Inc.

RBC Monthly Income

This Canadian neutral balanced fund invests in a mix of high-yielding common stock and bonds. "The fund has a good management team behind it," and is "very conservative managed," he said. "The fund also has a very low MER." The biggest downside to this fund is that it is not currently open to investors for registered retirement savings plans, he noted. BMO Guardian Monthly High Income II

This Canadian income trust equity fund has broadened to include high-yielding common stock as market opportunities shrink because trusts will be taxed like corporations by next Jan. 1. The fund is run by a team (including John Priestman, Kevin Hall, and Michelle Robitaille) that does not expect a big drop in distributions after 2010, he said. This fund is better suited for investors seeking capital growth and income.

Vikash Jain, president,

Archer ETF Portfolio Management

iShares Canadian Dividend ETF (XDV-TSX)

This ETF holds 30 stocks of the biggest dividend-paying Canadian companies, Mr. Jain said. "Canada is the dividend sweet spot of the world just now - quality companies offering great dividends." With about two-thirds invested in big financials and another 20 per cent in telecoms and utilities, this low-fee ETF is fairly concentrated, but has reliable payouts, he said.

Claymore S&P/TSX Canadian Dividend ETF (CDZ-TSX)

This ETF is weighted by dividend yield versus market capitalization. It holds about 70 companies with growing dividends, and have at least $300-million in market value, he said. "It's a better cross-section of the Canadian market [than XDV] with about 37 per cent in financials and 20 per cent in energy." There is about 20 per cent in income trusts whose yields could come under pressure as they convert to corporations, he added.

Gordon Pape, author of the Income

Investor newsletter

RBC Canadian Equity Income

This Canadian income trust equity fund has diversified to include dividend-paying stocks as more trusts convert to corporations. Manager Jennifer McClelland has been doing "a clever job," he said. The fund owns trusts that can maintain payouts after converting to a corporation by next January, as well as dividend-paying stocks such as Thomson Reuters Corp., Brookfield Asset Management Inc. and George Weston Ltd., he added.

RBC Monthly Income Fund

This Canadian neutral balanced fund, which is not available for non-registered accounts, "has been a consistent performer," he said. "It has been one of the best of the monthly income group, generating steady returns and adding to its net asset value in the process." The cash flow to investors has been maintained at a constant level, so that is helpful for those who depend on steady income, he said.


Fund picks for yield seekers

Assets ($-mil) Latest% returns (as of Feb. 28)Distributions (52-wk)
Fund name (as of Feb. 28)MER1-yr3-yr5-yr10-yrIncome $Capital Gain $
BMO GDN Mthly High Income II6572.3052.90.84.3 0.72
CI Signature Dividend1,4641.7941.2- 0.27 0.21
CI Signature High Income3,4491.5234. 0.57 0.28
Claymore S&P/TSX Cdn Dividend ETF2150.6460.60.1 0.89
Dynamic Dividend4681.5828.8- 0.22
RBC Canadian Equity Income932.0472.312.8 0.81 0.68
RBC Monthly Income7,0361.1423. 0.57
TD Dividend Growth3,8351.9247.3-1.85.510.4 0.44
iShares CDN Dividend Index5670.5052.6-2.0 0.73
MSCI World ($ Cdn)28.5-9.4-1.3-2.6
S&P 500 Composite Total Return Idx($Cdn)27.3-8.9-2.7-3.4
S&P/TSX Total Return47.6-
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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