Picking an Income Fund

There are some good choices available but you have to know what to look for. Gordon Pape offers some tips.

Everyone is looking for income these days. Even people who don’t need steady cash flow are loading up on income-paying securities, in part because they are perceived as being less risky.

With interest rates so low, attention has focused on dividend-paying stocks. As a result, prices have been pushed to unattractive levels in many cases. Preferred shares are another option, although many people don’t really understand them.

Income-generating mutual funds and ETFs haven’t been getting as much attention, but there are a lot of them out there. The problem is picking one of the top ones. I suggest you look for four key criteria in making a selection. They are:

Regular payments. Distributions must be made at least quarterly and preferably monthly.

Low to moderate risk. Plenty of funds are available that offer a good risk/return profile. This doesn’t mean the fund can never lose money, of course, but losses should be less than those in the overall market.

Track record. Because of the demand for income securities, new mutual funds and ETFs are being launched all the time. Some may do well but I prefer to see a history of steady performance and a stable to rising NAV.

Consistency is essential in an income fund and this one has been a first or second quartile performer in the Canadian Equity Balanced category from 2007 through the first quarter of this year. Results are well above average for all time frames from one to five years, with a five-year average annual compound rate of return of 8.5% to April 30.

Now factor in risk. Although it’s not risk-free, this is one of the lowest volatility funds of its type that I found in my research. It weathered the crash of 2008-09 especially well, losing only 16.6% over the year ending June 30, 2009. The 70% equity weighting tells you immediately that this fund would likely lose ground in a broad stock market pull-back. But history suggests any losses would be contained.

Finally, there’s the NAV record. Despite the high yield, manager Robert Swanson has been able to increase the net asset value over time, from $13.14 on April 27, 2012 to $13.32 on April 26, 2013. So investors are not only getting good cash flow but also capital appreciation.

The units pay $0.06 a month ($0.72 a year). Of course, that rate could change at any time but right now they appear to be sustainable without putting pressure on the NAV.

This fund is suitable for investors who want a diversified portfolio of mainly mid-size companies that offers steady cash flow and acceptable risk. The units are available from any broker or mutual fund dealer. The minimum initial investment is $500. If you don’t have a fee-based account, try to acquire the front-end A units at zero commission.

Ask a financial advisor if this fund is right for your needs.

Adapted from an article that originally appeared in The Income Investor. Three-month trial only $25.95 plus tax. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=396