Many investors like income. They like to get paid. There is great enjoyment in watching the dividends or bond income or specialty income arrive in the portfolio. It feels like a pay cheque. Investors do not always get that same satisfaction from watching their portfolio value shoot up in spectacular fashion. Perhaps they don’t trust the stock markets? Let’s have a look at income investing in Canada in 2019.
For ETF benchmarks we’ll head to the source for big dividends and specialty income – BMO Exchange Traded Funds. BMO offers many options from core dividend funds, REITs, preferred shares, sector funds, plus covered call and put write strategies. The assets are often offered with the ability to build a globally diversified portfolio.
BMO Monthly Income.
BMO offers a pre-packaged fund of funds for those who seek monthly income. The asset allocation selection and portfolio management is performed for you. You simply sit back and collect the monthly payments.
And here is the collection of ETFs and their weightings.
The fund offers a current yield of 4.3%. The MER for the fund is .61%.
The unit price on January 1, 2019 was 15.19, the monthly distribution to come along was .06 offering an annualized yield at the time of 4.73%. The distributions have remained consistent at that .06 with an additional reinvested distribution (for tax purposes) in December of 2019.
That was a very decent income haul for 2019. What brings down the yield in that portfolio is the use of the corporate bonds and the shorter duration bond funds. The bond holdings may be an attempt to manage risks, but corporate bonds are not the best risk managers. Certainly high yield bonds would not have done the trick either. Higher yield (often termed junk) bonds can act more like stocks than traditional investment grade bonds or government treasuries.
Bonds that punch above their weight.
I’d be of the school that if you enjoy an income approach and want some bonds to manage risk – go for the longer dated bonds and those treasuries. Or perhaps simply use the core broad based bond funds such as BMO’s aggregate bond fund for Canada. Developing market bonds can offer greater yield and can deliver an additional lesser-correlated asset. You might employ less allocation to the bond side but with bonds that punch above their weight for risk management.
For those who build their own ‘bmo-like’ monthly income portfolio, they might then be able to generate greater yield while still managing the risks.
I had included the BMO Monthly Income fund as a suggestion in this popular post – The simple 7-ETF portfolio for Canadian retirees.
Those specialty income ETFs.
A Canadian investor who is investing for income can build that (even higher yield) portfolio by way of selecting from the specialty income ETFs.
And continuing down that speciality income section …
A simple approach might be to use the Canadian, US and European High Dividend Covered Call ETFs. With an income slant to the Canadian side, one could create a portfolio with a current yield in the area of 6.5% . Of course the total portfolio yield would be reduced by any allocation to bonds.
The covered call ETFs hold the individual stocks and write calls against those holdings. That can limit the total return potential but can deliver greater yield beyond the dividends. Investors are paid a premium. I will be back in the near future with a dedicated post on covered calls and put write strategies.
Investors in these assets would have been able to start the year with a greater yield at time of purchase. For example the Canadian covered call offering kicked off 2019 with an available yield of 7.2% , and then delivered a 4.7% raise.
Those higher prices are delivering lesser current yields. Your personal yield on cost will be determined by your multiple purchases and the income increases or decreases.
The core dividend ETF approach.
Many investors will use individual stocks (see Mark Seed of my own advisor) or they will hold dividend ETFs such as the BMO offering or the Vanguard VDY or the Invesco PDC. All ETF providers offer dividend options. An investor can create a Canadian, US and International dividend portfolio. In periods of robust stock market gains (and accompanying economic expansion) those generous dividends will typically increase year over year.
Here’s an example with Vanguard’s VDY as Portfolio 1 and Invesco PDC as Portfolio 2. We see that VDY experienced a modest cut in the Canadian energy-inspired market correction of 2015/2016. PDC was able to keep that dividend growth streak intact. The example is based on an initial investment of $10,000.
The chart is courtesy of portfoliovisualizer.com.
How did the dividends hold up? 2019 was smooth sailing on the dividend front. The BMO Canadian dividend fund offered a slight increase in dividends in 2019. PDC has also delivered a modest increase in 2019. Vanguard VDY is set to report a sizable dividend increase in 2019 over 2018. Here’s the VDY history to 2018.
iShares XEI has delivered a decent bump in 2019 over 2018. Though that fund is still recovering from previous dividend disruption.
For US holdings the yields available are not impressive due to the stock price runs ups. They currently are in the area of 2.8% and started the year in that 3% area. But there is still very good dividend growth, and of course those wonderful total returns. US listed ETFs such as Vanguard’s VDY and Schwabb’s SCHD are delivering on that dividend growth promise. The BMO US dollar dividend offering delivered a 13% dividend increase in 2019, and 18% in the CAD hedged fund.
BMO offers a globally diversified high dividend fund ZDI. The current yield is 5%. The starting yield for the year was much more generous. Again the yields and PE ratios are much more generous in Canadian and International funds. Those two geographies may end up doing more of the portfolio heavy lifting on the income and total return front.
An equal weighting of those Canadian, US and International dividend funds would have delivered total returns in the area of 20%. They provided generous income and very good total returns in 2019.
Today, one could create a globally diversified big dividend portfolio with a total starting yield in the area of 4%.
Should you chase income?
I understand the attraction of yield, especially from juicy and growing dividends. But there are many that will warn of the shortcomings of income investing. We can take on different kinds of risk. We might lack diversification. Income investing in any year may not be the most tax efficient approach. The amounts ‘lost’ to withholding taxes from US and International companies can also be amplified in certain account types.
And many will remind us that in retirement we can simply make our own homemade dividends. I am in the camp of generous dividend income for the Canadian stocks in tandem with a total return approach for US stocks. There’s some risk management by way of ‘better’ bonds.
I find many readers report shading in some of the specialty income offerings, not using those ETFs as a sole focus. We certainly don’t have to go all in.
As always when it comes to investing – to each his or her own.
Thanks for reading my overview of income investing in Canada for 2019. Please offer your thoughts in the comment section. Do you invest for income? You might shade in some generous income? Or perhaps you’re total return all the way.
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