Two income funds for 2012

Happy New Year! Unfortunately, it is not likely to be an easy one for income investors, with interest rates at near-record lows and the income trust market virtually dead. However, there are still some respectable options out there. Here are two no-load funds that I think are appropriate for the current situation. Choose the one that best matches your risk tolerance.

RBC Canadian Equity Income Fund. Manager Jennifer McClelland has skilfully transformed a former income trust fund into a high-yield equity fund that has outperformed just about everything else in the Canadian Dividend and Income Equity category. According to Morningstar.ca, the fund produced a total return of 10.3 per cent in 2011 (A units), more than 11 points above the category average. Over the past three years, it generated an average annual compound rate of return of 28.1 per cent.

The fund offers good cash flow with current distributions running at $0.09 a unit per month ($1.08 per year). Based on an NAV of $22.76, that projects to a yield of 4.7 per cent over the next 12 months.

Volatility is slightly above average for a fund of this type so there’s more risk involved than with a traditional dividend fund. However, the strong returns more than compensate for that.

Buy this one for good cash flow and capital gains potential. The code for the Series A no-load is RBC591.

Phillips, Hager & North Short Term Bond and Mortgage Fund. If you’re worried about stock market risk and willing to live with a lower return, this is the fund to choose. It gained 3.6 per cent in 2011 (D units), a very good return for a low-risk fund such as this. How safe is it? The worst 12-month period since it was launched in 1993 was a 2.02 per cent drop over the year ending Jan. 31, 1995. That’s as bad as this fund ever gets.

The managers invest in a portfolio of investment-grade short-term fixed-income securities (about 59 per cent of total assets) plus some CMHC and conventional mortgages (11.6 per cent) and a large amount of cash (29.3 per cent). Thus you have a very defensive portfolio for protecting your assets, it that is top of mind.

Quarterly distributions have recently been running at $0.07 per unit. If that continues through 2012, the yield will be 2.7 per cent based on an NAV of $10.50. The code for this one is PHN250.

Ask your financial advisor if either of these funds is appropriate for your needs.

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