Thursday, April 12, 2018

Retirees and Investing in Monthly Income Funds?


A few select Canadian big banks have what they call monthly income funds. Some top ETF providers also have these on offer. They are really popular with retirees to earn revenue that is consistent on a month to month basis.

They are sold as providing investors with a stable stream of distributions. How do you define stable? If you mean that you will always get a sum of money deposited into your account, then yes it's stable.

If you mean stable in the sense that the cost of ownership remains the same or that the distribution increases or and even decreases over time. Then NO, these are NOT stable.


These are the 2 funds provided by Canada's largest and oldest ETF provider;

FIE - iShares Canadian Financial Monthly Income ETF 

  • MER 0.94% (very expensive)
  • Distribution Yield 6.56%
  • Distribution per share 0.04 cents
  • Fund Return 2017 = 12%
Holdings are comprised of a corporate bond etf and pref share etf. Also individual pref shares from Canada's big banks.

Here's the problem; NO distribution growth. You can not keep up with inflation just getting paid 4 cents on your money every month. FIE has paid 4 cents a month from 2011-2018 so far. In 2010 they paid 3 cents a share.

You are falling way behind owning this. Matter of fact when you look at the purchasing power of your dollars you're actually falling behind. Why? No growth in your distributions. There is also loss of capital here on a regular basis. The fund returns some of your money back to you every month to help generate returns.

Very expensive way to have your money paid back to you. I would never own this junk.


XTR - iShares Diversified Monthly Income ETF

  • MER 0.62%
  • Distribution Yield = 5.42%
  • Distribution per share 0.05 cents
  • Fund Return 2017 = 6.52%
This is just a mish mash of 11 iShares ETFS. A fund of funds if you will. From 2010-2016 the fund paid out a distribution of 7 cents. For the last 2 years the distribution has been going down.

As a dividend growth investor the goal is to buy companies that grow the dividend. Why would we buy these ETFs when the distributions are going down? They never go up when you need the money most.

If you're a retiree these are just plain bad for you. I would never buy one. I want a growing income in retirement and not one that is in decline like these iShares funds.

Let's look at a bank ETF

ZMI- BMO Monthly Income ETF
  • MER 0.61%
  • Distribution Yield = 4.54%
  • Distribution per share = 0.05 cents
  • Fund Return 5 year average = 3.84%
Here we have a Bank ETF that is also reducing it's monthly distribution down from a high in 2010 of 7 cents, to now paying out 5 cents a share.

It's expensive to own, yield is low and distributions are declining year after year. Don't buy!

RBC Monthly Income Fund

  • MER 1.2 % (the most expensive yet)
  • Distribution Yield = 2.42%
  • Distribution per share = 0.51 cents total in 2017
  • Fund Return on avg. = 4.7% yearly
This fund consists of 621 total holdings. 255 stocks, 359 bonds and 7 other holdings like an RBC dividend fund.

Another dog's breakfast of stocks and bonds to provide regular monthly income to shareholders.

Low yield, high management fees, too many bonds.

They do divulge that you can lose money holding this fund. NOT what a retiree wants to hear.

From their website;

"A person who invested $1,000 in the fund ten years ago would have $1,583 as at May 31, 2017."

Now isn't that a scary disclosure? That's more than enough to scare me off. What a measly return and zero rise in distributions. Forget growth of income and growth of your capital, it's NOT there.

If you want to buy something from RBC, just buy the common shares of the stock. Symbol RY. You would be so much better off.

In 2007 RY paid $1.82 in dividends. In 2017 it paid $3.48. That is growth in your distributions over a 10 year period of 6.7% every year. It's dividend has risen almost 100%. 

In 2004 you could buy RY stock for $25.

Today it's $98.04.

That's a growth on cost of just short of 300%.

What would you rather buy?

Compare that to declining distributions from the monthly income fund and their low monthly yield. You are way better off buying the common stock. Clearly!

Invest in the bank but 'Never Invest With Your Bank'

My Final Take

Buying individual dividend growth stocks will provide you with better monthly/quarterly income than any ETF income fund or any monthly income fund provide by any of the big banks.

I only highlighted a few (there are too many to mention) to show the pitfalls and dangers of investing in them for retirees and investors alike.


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