A dividend fund that isn’t

I receive a lot of queries from people who are looking for a good dividend income mutual fund. One that gets their attention is the Phillips, Hager & North (PH&N) Dividend Income Fund, even though it requires an initial investment of $25,000.

It’s no surprise that the fund attracts so much interest. The first thing that most people look at is performance and this fund has all the numbers working in its favour. This has been one of the top-performing funds in the Canadian Dividend category for years.

It has outperformed the peer group over all time periods from three to ten years, and in fact it ranks number one over the past decade with an average annual compound rate of return of 17.4 per cent.  The fund always shows up in the first or second quartile of its category, meaning it consistently beats the averages.

High degree of emphasis on safety
The portfolio concentrates on high-yielding common stocks rather than preferreds (in fact, you’d be hard-pressed to find a preferred share here). However, the stock selection process puts a high degree of emphasis on safety (there are few cyclicals in the portfolio). There is a irly large U.S. component (14.2 per cent of assets in the first quarter of 2005), which is somewhat unusual for a dividend fund and has been a drag on returns in the past couple of years because of the rise of the Canadian dollar. The managers say they do this to gain exposure to companies with high-quality business models that are not available in Canada.

But there is a caveat to my praise for this fund. While it has a great performance record, cash flow is not its strongest suit, so keep that in mind if you’re an income-oriented investor. In the 2004 calendar year, this fund’s cash flow yield was less than 1 per cent, among the lowest in the dividend category. In reality, this is more of a blue-chip equity fund than a dividend fund, and it should be viewed in that context when you make your purchase decision.

That said, it’s a very fine equity fund. Just remember that this is not a conventional dividend fund and it will be especially vulnerable to negative developments like a big pullback in bank share prices since financial stocks make up more than half the portfolio. That’s why the risk profile is worse than average when compared to other dividend funds. Still, for a long-term investor, you won’t do much better if you’re seeking a conservative, well-managed Canadian stock fund. It’s a good choice for RRSPs and RRIFs for that reason.

Be sure to discuss the fund with a financial advisor before making any purchase decision.