At the Money Reporter, we rely on mutual funds especially to cover off your U.S. and international exposure, but also to give you some diversity in your Canadian equity allocation. The question is what are the best Canadian Funds to hold for this purpose?
Today we extend our fund focus to a category of Canadian equity funds that all have positive one-year MER coverages. This measure indicates that each fund made more return for its investors than it charged them in terms of fees. The category is our recommended income/dividend/balanced funds.
In this case we put a specific focus on dividend paying mutual funds: the Scotia Canadian Dividend Fund, fund code BNS385(NL).
Income investors like a steady and gradually increasing price base, ideally with a steady and gradually rising stream of income from that base. It’s even better if that income gets the benefit of the dividend tax credit. At the same time, you don’t want to pay a mutual fund too much to get that combination.
The Scotia Canadian Dividend Fund is a good compromise. It currently carries a one-year MER coverage of 7.51times, which is the second-highest of our fund selections in this category, and quite acceptable in light of how tough the market has been for equities in the past twelve months.
As a reminder, one-year MER coverage measures by how many times the fund’s one-year return exceeds the fund’s MER. The Scotia Canadian Dividend Fund has made 12.62% in the past year, and that’s 7.51 times the 1.68% MER it charges.
This fund focusses on dividends, and we like that. Dividends indicate that the underlying company is a quality, mature business. By way of contrast, most small-cap stocks don’t pay dividends. Dividends also lead to stock price stability, cushioning the ups and downs in volatile markets.
Moreover, dividends provide reasonably predictable quarterly cash flow into your portfolio, and if you don’t need the cash, you can often reinvest it automatically into more fund units. Plus, dividends are taxed almost as favorably as capital gains these days.
The main investment objective of the Scotia Canadian Dividend Fund (BNS385(NL)) is to earn a high level of dividend income with some potential for long-term capital growth. The strategy is to invest in dividend-paying common shares, plus in a broad range of preferred shares, of Canadian companies.
In terms of nuts and bolts, this fund has been around since October 1992 and has some $3.2 billion in assets.
It is RRSP eligible, charges no loads, and has an MER of 1.68%. The ten-year compound return is 7.1%, which is second quartile.
The fund is invested 72.8% in Canada, and 23.4%% in the U.S., plus 2.1% in the European Union and 1.7% in Latin America.
If you like dividends (and who doesn’t?), this fund is a reliable way to start streaming them in your direction.
Five payout increases
The annual earnings reporting period is a popular time for our companies to increase their dividends/distributions. This issue of the Money Reporter we have five such examples.
Canadian REIT (TSX:REF.UN) will be increasing its distribution by 6.1% or $0.10 effective as of February. This brings the annual rate to $1.75 per unit. It’s the thirteenth consecutive year that REF has increased its distributions.
BCE Inc. (TSX:BCE) earned less in the fourth quarter of 2013, but increased its dividend by $0.14 per share to $2.47 per share annually, starting with its scheduled payout on April 15.
Enbridge Inc. (TSX:ENB) increased its dividend by 11% to $0.35 per share as of March 1, 2014, or $1.40 annually.
Fortis Inc. (TSX:FTS) has increased its quarterly dividend to $0.32 from $0.31 as of March 1, 2014, or $1.28 annually. Fortis has raised its dividend for 41 consecutive years, the record for a public corporation in Canada.
TransCanada Corporation (TSX:TRP) will pay $0.48 per common share as of March 31, 2014, or $1.92 annualized. This is the fourteenth consecutive year TRP has raised its dividend.
Money Reporter, MPL Communications Inc.
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