Lately we have received a few emails from readers asking about monthly income funds from the Canadian big banks.  A monthly income fund is a type of actively managed mutual fund that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital appreciation.

These funds hold a variety of government, municipal and corporate bonds, preferred stock, and dividend stocks.  Monthly income funds are designed for people seeking a reasonably consistent level of monthly distributions.

I researched the monthly income funds offered at each of the Canadian big banks and have put together this chart for comparison (updated December 6th, 2012).

Canadian Monthly Income Fund Comparison

Annual dividend per share 72 cents 72 cents 51 cents 37 cents 36 cents
Yield 9.98% 5.7% 3.9% 2.12% 3.63%
Expense ratio (MER) 1.57% 1.48% 1.2% 1.48% 1.43%
% of stocks, bonds, cash 52,45,3 53,42,5 43,48,9 59,36,5 49,40,11
Min. initial investment $500 $500 $500 $100 $500
Min. subsequent investment $50 $25 $25 $100 $50
5-year return 2.58% 0.97% 3.76% 3.42% 2.68%
Net assets per share $7.21 $12.66 $13.20 $17.22 $9.90

Which Monthly Income Fund Should You Choose?

Since the stock market crashed in 2008, monthly income distributions have been anything but steady, and with annual returns under 4 per cent you’re treading water at best after inflation.

Each of the big bank income funds, other than BMO, reduced their distributions at least once since 2007.  TD slashed its annual distributions from 48 cents to less than 37 cents a share – a nearly 24 per cent reduction – while RBC cut its distributions from 57 cents to 51 cents per share – a 10.5 per cent decrease.

BMO’s monthly income fund has kept its distributions steady at 72 cents throughout the market turmoil and currently yields nearly 10 per cent, however investors should be wary because such a high yield isn’t sustainable for the long term.

The distributions could be cut, but even if they remain intact it’s likely that investors will just be getting their own capital back.  Return of capital means the net asset value of the fund will erode over time and investors will need to track their adjusted cost base or face tax implications when they sell.

If you’re looking for total returns (not just monthly income) you might be better off choosing the RBC or TD monthly income funds.

I don’t like paying investment fees and prefer a do-it-yourself approach when it comes to investing.  It wouldn’t be that much of a stretch to try and replicate this portfolio on your own.

By choosing some large-cap Canadian stocks in the financial, energy, and consumer staple sectors and then creating a bond ladder, you could produce your own income fund without the high MER.

What are your thoughts on buying a Canadian monthly income fund?  Do you own one and, if not, which one would you buy today?

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