An ETF for Income Investors
Don’t have the time or the skill to build your own income portfolio? Gordon Pape has an ETF for you
For many investors, steady cash flow is the top priority. But they don’t have the time or the skills to build a credible income portfolio themselves. If you’re in that group, there is an ETF you should look at: the iShares S&P/TSX Equity Income Index ETF (TSX: XEI).
Here are the details.
Type: Exchange-traded fund
Trading symbol: XEI
Current price (July 17): $23.38
Annual payout: $0.96 (approximate)
Why we like it: The focus on dividend-paying stocks makes this an ideal ETF for income investors who want to diversify their portfolios. Performance thus far has been very good although it is important to remember that this ETF hasn’t experienced a market downturn. Over the year to June 30, it gained 25.4%. The three-year average annual compound rate of return to that point was 10.1%.
Financial highlights: In March, BlackRock Asset Management, which owns the iShares brand, announced the annual management fee has been slashed from 0.55% to 0.2% as part of the escalating ETF price war, making this fund a real bargain for investors. The reduction of 0.35 percentage points will improve investor returns going forward.
Risks: This is an all-equity portfolio so a market correction would have a negative effect on the share price.
Distribution policy: The fund pays monthly distributions, which have recently been running at $0.08 per unit. At that rate, which is not guaranteed, the yield is 4.1% based on the July 17 morning price of $23.38. There is a dividend reinvestment plan for investors who don’t need the cash immediately.
Tax implications: There are tax advantages to this fund if the units are held in a non-registered account. In 2013, investors received distributions totalling about $1.40 per share. Of that, 63.6% was eligible for the dividend tax credit, 32.2% was taxed as capital gains, and the rest was treated as tax-deferred return of capital. These percentages will vary from year to year.
Who it’s for: This ETF is best suited to investors who want a broadly diversified Canadian stock portfolio that combines good cash flow with capital gains potential.