Big Bank Monthly Income Fund Comparison
A reader emailed me asking about the differences between the big bank monthly income funds as they all seem to have one. At first glance, they are all fairly similar with mostly Canadian exposure invested in a combination of dividend paying equities and bonds. However, digging a bit deeper, there are noticeable differences in terms of cost, distributions and performance.
To get an accurate picture, I surfed over to the morning star website to do some research on the various monthly income funds. Here is a summary of what I found (as of June 30, 2009):
| CIBC | RBC | BNS | TD | BMO | |
| MER | 1.41% | 1.14% | 1.39% | 1.40% | 1.49% |
| Morning Star Rating | 4 | 5 | 3 | 4 | 4 |
| Div / Share | $0.88 | $0.57 | $0.50 | $0.42 | $0.72 |
| Current Yield | 7.10% | 4.77% | 5.56% | 2.95% | 9.08% |
| Equity/Bonds/Cash | 60/26/12 | 42/50/5 | 45/38/13 | 60/31/9 | 42/54/3 |
| Load | none | none | none | none | none |
| Min Investment | $500/$25 | $500/$25 | $500/$50 | $100/$100 | $500/$50 |
| 10 Year Return | 7.50% | 7.50% | not avail. | 7.50% | 4.80% |
| Net Assets (millions) | $5604 | $6,235 | $646 | $3,614 | $4,463 |
| NAVPS | $12.40 | $11.95 | $8.99 | $14.25 | $7.93 |
| Foreign Exposure | none | none | 6% US | none | none |
Looking at the table, it seems that each fund has their pros/cons. RBC seems to be the lowest cost with the highest morning star rating, but with a lower distribution relative to the rest. I personally own CIBC Monthly Income which seems to be in the middle of the pack with an above average distribution. If I were to pick an income fund today, it would probably be the BMO Monthly Income Fund. They have been paying $0.72 dividend /share for years now which works out to be a fairly high yield at today’s price (NAVPS).
It’s worthy to note though that each of these funds have a significant bond allocation which should be accounted for in your total portfolio asset allocation. As well, since bond distributions are considered interest income, it may be the most tax efficient route to hold these funds within an RRSP or TFSA.
Do you own any of the big bank income funds?
29 Comments, Comment or Ping
1. Kent
Great post! One income fund I’ve been fond of is the Mac Sentinel Income Fund. It’s MER is reasonable, around 1.8%, and provides significant downside protection, -9.6% was its worst year since inception. What do you think of it?
Jul 13th, 2009 @ 8:35 am
2. DavidV
So are income funds basically index funds of dividend paying stocks?
Jul 13th, 2009 @ 10:17 am
3. FrugalTrader
David, afaik, the income funds mentioned above are actively managed.
Jul 13th, 2009 @ 10:36 am
4. Tim
FT – do you hold the CIBC fund in a TFSA currently? Curious if you use Questrade for your TFSA…
Jul 13th, 2009 @ 10:41 am
5. FrugalTrader
Tim, my CIBC monthly income fund is held within my RRSP. Believe it or not, I haven’t had the chance to open a TFSA yet. But when I do, it will most likely be with Questrade.
Jul 13th, 2009 @ 10:45 am
6. ToT
Hi,
Thanks for that – I can’t find any of these funds on the morningstar website. What are their names or codes?
The yields look too high – is part of that distribution return of capital or are they leveraged?
Thanks!
Jul 13th, 2009 @ 10:48 am
7. Henry
If costs are a concern, RBC Monthly Income Series D’ MER is only .84% and PH&N Balanced Series D’s MER is only .87%. RBC Monthly Income Series D is only available through RBC Direct Investing. PH&N Balanced Series D is available without transaction costs at RBC Direct Investing, Scotia iTrade, and BMO Investorline.
Disclosure: I personally own CIBC Monthly Income. I have been very disappointed about its management. Downside risk was not minimized during the crash and the manager didn’t take the opportunity of lower prices to increase equity allocation. Preet recommends that tactical asset allocation funds are the way to go if you want flexible asset allocation.
Jul 13th, 2009 @ 10:54 am
8. FrugalTrader
Here they are:
cibc:
http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=2820
BMO:
http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=2442
RY:
http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=3141
TD:
http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=2792
BNS:
http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=76270
Jul 13th, 2009 @ 10:56 am
9. Tim
From that link the yield on the CIBC fund is 5.23% and the table above has it at 7.10%. What makes up the difference in yield?
Jul 13th, 2009 @ 10:59 am
10. Blogging Banks
At 1.1% to 1.5% annual expense isn’t it better to just do the income portion on your own by properly allocating fixed income and equity investments?
Also what is your take on individual cdn bank stocks? Are the divs safe?
Jul 13th, 2009 @ 11:12 am
11. FrugalTrader
Tim, I took the 2008 distribution of $0.88 and divided by the current NAVPS. The assumption is that 2009 will have the same distribution as 2008. You’ll notice from the link that the fund has paid 0.72 over the past several years.
Blogging Banks, my personal opinion is that Canadian bank dividends are safe for now. If you take a look at the div payout relative to earnings, they are a bit on the higher side historically, but nothing to be worried over (IMO).
Jul 13th, 2009 @ 11:24 am
12. cannon_fodder
I think what is most interesting is the allocation between equities/bonds/cash. It would be interesting to see how that allocation has changed over the past 3 years.
CIBC and TD look the most aggressive with BMO and RBC most conservative (if you consider higher proportion of equities vs. bonds as being aggressive).
It would seem that CIBC and TD can’t put much more money in equities whereas BMO and RBC could if that is their strategy.
Jul 13th, 2009 @ 12:22 pm
13. Kirk S.
I have been looking into the RBC Monthly Income fund for my fixed investments in my RRSP, but currently have the Bond Index fund. All of those options seem to have a great yield!
Jul 13th, 2009 @ 7:59 pm
14. cxd771
The yields seem higher because stock prices have been hammered recently as we all know. I’ve held BMO monthly income for a long time. They have never cut the dividend or missed a dividend payment. If there is a shortfall on cash for a dividend payment, they make up for it with return of capital. I’m a little worried about such a high yield as it is not sustainable in the long term.
Jul 14th, 2009 @ 1:20 am
15. Kevin Hall
Hi, just wanted to comment on some of the info on RBC. I bank with them so I am familiar with their funds and policies. When I opened my TFSA the first thing I thought of was contributing to the Monthly Income Fund and reinvesting the dividends. Unfortunately, it is no longer open to Registered accounts and the TFSA is considered one. Secondly, the .84% MER for the series D funds is great if you have the $10000 minimum to open the fund. Hope this helps anybody making up their mind.
Jul 14th, 2009 @ 1:29 am
16. Journey
I am still trying to work my way out of 110k in student loan debt. Maybe one day ..I will get to this place.
Jul 14th, 2009 @ 4:13 am
17. Tom @ Canadian Finance Blog
I’ve never really looked into income funds before, I find the MER a bit high to interest me.
Jul 14th, 2009 @ 3:19 pm
18. Mark in Nepean
I think income funds or index funds, are the way to go for the TFSA, especially when the fund provides a dividend.
That will be my plan for the 2010 TFSA.
Jul 14th, 2009 @ 8:58 pm
19. Jordan
@FrugalTrader
I’m curious why do you use an actively managed income fund instead of using passive index funds / etfs with lower expenses? Have they outperformed?
Also I’m curious what your opinion is of income funds with high distributions due to Return of Capital, it’s not really making money but to the average investor it looks like it’s got a great return.
@Kent
My parents own Mac Sentinel Income Series and I can tell you the worst period is not -9.6%, MorningStar shows the worst 1 year Rate of Return as -14.1% and that’s after the fund has recovered some. Holding over the last year as been a gigantic struggle for my folks.
http://www.morningstar.ca/globalhome/quicktakes/Fund_Performance.asp?fundid=417
Jul 15th, 2009 @ 6:30 am
20. FrugalTrader
Hey Jordan, CIBC monthly income fund was one of the first funds that I purchased with an advisor many moons ago and I’ve just left it in place. In the future, I will most likely transfer that account to my self directed account and use ETFs instead.
Jul 15th, 2009 @ 7:55 am
21. Jordan
@FrugalTrader have you ever benchmarked your income fund’s performance against comparable indexes to see if you did better or worse?
Jul 15th, 2009 @ 7:57 am
22. MyLifeInBrampton
@Tim.
The distribution for the CIBC Monthly Income is actually 0.06/monthly = $0.72/year which gives the 5.23% return, not 7.10%.
The above table is incorrect unless the distribution has been changed on the last 2 weeks since June 30 distribution.
Jul 16th, 2009 @ 2:51 pm
23. Neil Hampshire
Hi, I just want to share that buying $90,000 of BMO Monthly Income average cost 8.07/share giving around $670/month means that I can keep leasing a new car just off my dividends. I can get car insurance, oil changes, maintenance, etc if I wanted to. Or I could have rent and utilities covered. But right now, I am reinvesting 70% of it roughly and living off the rest. At age 33, I am a bit behind with my portfolio, and having only 70% of it reinvesting, I am worried that I am not going to grow this fund fast enough. I am only making $35,000/year from work so there is not much room for adding money from my paycheque. I am wondering if any of you know any better strategies out there.
Jan 18th, 2010 @ 7:56 am
24. Sputs
I noticed that RBC Income fund is not available for TFSA or RRSP. Has anyone faced this issue with the other incomme funds?
Jan 24th, 2010 @ 8:50 pm
25. Paul
I have been researching the BMO fund for a few weeks. Getting that distribution back every month really looks tempting. Especially when you consider your Drips repurchase more shares every month and the fund compounds on itself.
A $5000.00 investment will give you about a $37.00 dividend every month that will purchase 4 1/2 more shares if you reinvest. (at todays rate). Seems like a pretty good deal.
The one thing which now concerns me about this fund is something called “return of capital” ROC. In order to maintain the steady distribution the fund gives you back some of your own money each time.
Is that something to worry about? Does it devalue the fund?
May 28th, 2010 @ 6:22 pm
26. badcaleb
I like coming back to this posting whenever I revisit whether or not to buy any of these funds (still haven’t). Just found this recently: http://blog.canadianbusiness.com/know-your-monthly-income-fund/
Jun 15th, 2010 @ 4:29 am
27. Jim
Hi,
I know that when the distribution is received, the unit cost of the monthly income fund is reduced by that amount. So, there comes a point, if one holds on to the fund long enough, the unit cost of the fund will be $0.
Does anyone know what happens when the unit cost of the income fund reaches to zero due to ROC? Do you still own the units or are you considered to have sold the units at that point in time?
Thanks so much for helping me to understand this point.
Jim
Aug 18th, 2010 @ 12:03 pm
28. FrugalTrader
@ Jim, when your ACB reaches $0 from ROC, I believe any excess is treated as capital gain. However, this should be confirmed by an accountant.
Aug 18th, 2010 @ 12:13 pm
29. Ed Rempel
Hi Jim & FT,
Yes, you are right, FT. Once your cost base reaches zero, then every dollar of ROC you receive is considered to be a capital gain for tax purposes from then on and needs to be reported annually on your tax return.
When you sell, 100% of the proceeds is then a capital gain as well, since your cost is zero. This is why ROC is not a tax-free cash amount – it is a tax deferral only.
Ed
Aug 18th, 2010 @ 2:42 pm
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