Own this equity income fund—for income and capital gains

Diversified, conservative equity mutual funds make good core portfolio holdings, of course. But conservative investors would also do well to include a top Canadian dividend fund or equity income fund, such as the Dynamic Equity Income Fund, among their core holdings as well.

Many successful investors who invest directly in stocks find that over the course of a decade or two, dividends supply up to a third or even half of their total return.

It’s true that capital gains can supply more spectacular returns. But they’re irregular, often disappearing or leaving capital losses as a stand-in just when you need them most.

On the other hand, dividends and income from high-quality companies or income trusts are a reasonably steady source of income. Better still, they tend to ratchet upward over the years, keeping up with or exceeding inflation.

So be sure to consider some of the best Canadian dividend mutual funds for your equity portfolio.

You get dividends, capital gains and return of capital

One we like especially is Dynamic Equity Income Fund (Fund codes: DYN029 (FE), DYN729 (DSC), DYN629 (LL), DYN7013 (LL2)), a very conservative income-oriented fund. It pays a fixed monthly distribution of $0.07 a unit. Given its recent unit price of $18.74 a unit, that amounts to an annual distribution yield of 4.5 per cent. The distribution is usually composed of dividends, capital gains and return of capital. The proportion of each varies from year to year.

While the fund provides high income, its portfolio is conservative. About 56 per cent of its assets are invested in Canadian common stocks, 27 per cent in U.S. stocks, 10 per cent in real estate investment trusts, five per cent in cash and two per cent in private equity.

The fund’s top holdings, which make up about 30 per cent of the portfolio, include three of Canada’s big banks — Bank of Nova Scotia, Royal Bank and CIBC. Also among its top holdings is a U.S. bank – Wells Fargo & Company. In addition to the banks, the fund has a significant position in Manulife Financial, Canada’s largest insurance company. Altogether, the portfolio is 22-per-cent invested in financials.

The fund has 14 per cent of its assets invested in consumer-discretionary stocks. The top holding here is Walt Disney.

The fund has 13 per cent of its assets invested in real estate, mostly in conservative real estate investment trusts.

Volatility is below average for a mutual fund. The fund’s volatility rating is four out of a maximum score of 10.

Dynamic Equity Income Fund is a buy if you want income along with some growth potential and you can tolerate low to medium investment risk.

Don’t buy bond funds

Many investors use bond funds for the fixed-income portion of their total investment portfolio. We think that’s a mistake. In bond funds, you have little control over the very part of your portfolio where control is most important. To achieve this control, we recommend you invest directly in bonds or GICs.

Most bond funds place little if any restriction on the terms of their holdings. They vary the terms to take advantage of (speculate on) swings in interest rates. That means that if you want to redeem units of your bond fund, the price you get will depend on changes in interest rates and the terms of the investments in your fund. Consequently, you may even lose money if you’re forced to redeem units of your bond fund at a poor time.

And for this, you’ll pay a management fee. The median Canadian fixed-income fund has a management expense ratio of 1.70 per cent. With interest rates currently as low as they are, then, there’s very little room for these funds to produce a decent return given their high expenses.

Our recommendation is direct investment in a portfolio of GICs or bonds. With such a portfolio you can tailor your terms to maturity to meet your future needs for cash, thus retaining control of your fixed-income portfolio.


Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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