Port in a storm

After a great five-year run, the Canadian stock market has hit a wall. Tumbling
commodity prices and the weak financials sector have taken their toll on the S&P/TSX
Composite Index, which as of Aug. 20, had dropped more than 1,800 points (11.9
per cent) since its all-time high in June.

The plunge left investors nervous and desperately casting about for lower-risk
alternatives. Fortuitously, Guardian Capital chose this moment to provide an
option by reopening its popular GGOF Monthly Dividend Fund for new business.

The fund has been around since 1995 but was capped a few years ago because
of a lack of supply of preferred shares, which make up about half the portfolio.
However, a recent spate of new issues has changed that situation. In fact, if
anything there is now too much supply in relation to demand, which has contributed
to the decline in preferred share prices. The price retreat means that you can
now buy units at what I regard as a very attractive price.

The dual goals of the fund are to provide tax-advantaged monthly income and
to preserve capital. At least 50 per cent of the assets are invested in high-quality
exchangeable/retractable fixed and floating rate preferred shares and the managers
may also invest an additional 10 per cent in high-quality perpetual preferreds.

The fund, which I originally recommended to readers of my Mutual Funds
Update newsletter in October 2003, has done a fine job of meeting both
its objectives. Despite the big drop in the preferred share market, the Mutual
Fund units lost only 1.5 per cent over the 12 months to July 31 while the Classic
units were down 0.8 per cent. That was made possible by the fact the portfolio
also includes some first-rate income trusts, such as Canadian Oil Sands and
Enerplus, which offset the losses on the preferred side.

Historically, this is one of the lowest-risk funds of its kind that you’ll
find. It hasn’t recorded a losing calendar year since 1999, and even then the
decline was only 0.2 per cent. And it has an excellent cash flow record, with
monthly payments of 3.5c a unit (42c a year) for a yield of 4.4 per cent based
on the Aug 15 NAV of the Mutual Fund units of $9.62 (3.9 per cent for the Classic
units, which have an NAV of $10.64). In 2007, the entire distribution qualified
for the dividend tax credit if the units were held in a non-registered account.

I recommend the front-end load units, purchased at zero commission. But you
need to give some thought as to which version best meets your needs (GGOF has
a unique dual structure for some of its funds that can be confusing).

The Mutual Fund units have a higher MER of 2.13 per cent compared to 1.5 per
cent for the Classic units. As a result, you’ll receive a superior total return
from the Classic units. Over the past five years, they have produced an average
annual return of 6.9 per cent versus 6.2 per cent for the Mutual Fund units.

But because of their lower NAV, the Mutual Fund units offer a higher yield.
For every $1,000 invested, you’ll get 103.95 Mutual Fund units but only 93.98
Classic units. So the annual cash flow from $1,000 worth of Mutual Fund units
will be $43.66 compared to $39.47 for the Classic units.

That’s why I recommend the front-end Mutual Fund units (GGF558) if income is
your number one priority. But if total return is more important, choose the
Classic units (GGF411).

Talk to your financial advisor to see if this fund is right for your needs
and, if so, which version is the better choice for your portfolio.

Adapted from an article that originally appeared in Mutual Funds Update,
a monthly newsletter that provides advice on fund selection and strategies.
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