Investors looking for a decent income stream combined with the potential for capital growth could do worse than looking at BMO Monthly High Income Fund II. The fund pays investors a monthly distribution of $0.06 per unit, which works out to an annualized yield of approximately 4.5%.
Managed by the team of Kevin Hall and Michelle Robitaille, the fund invests mainly in high-yielding common equities and real estate investment trusts (REITs).
The managers look for potential investments in the higher-yielding names of the S&P/TSX Composite Index. While yield plays a key role, they are careful not to sacrifice investment quality in order to chase yield. The portfolio holds approximately 40 names, with the top 10 making up about a third of the fund.
At one time, this fund was actually an income trust fund and tended to be more focused on mid-cap names. However, since the demise of the income trusts, it has shifted more into larger-cap companies. At the end of December, the top holdings included Toronto-Dominion Bank (TSX: TD), Royal Bank of Canada (TSX: RY), Telus Corp. (TSX: T), and Bank of Nova Scotia (TSX: BNS), AltaGas Ltd. (TSX: ALA), and Canadian REIT (TSX: REF.UN).
Not surprisingly, the fund has significant exposure to higher-yielding energy and financial services stocks. Combined, these sectors make up nearly 70% of the fund. This concentration highlights one potential drawback to this fund – its high level of interest rate sensitivity. Compared with a more broadly diversified Canadian equity fund, this fund will be expected to lag when we start to see upward pressure on yields.
Performance has been strong, averaging 11.2% annually for the five years ending December 31, handily outpacing its peers. More impressive, it has done a solid job in managing both volatility and downside risk. For the past five years, it has only participated in about 25% of the downside movements of the broader equity markets.
The BMO offering, along with Sentry Canadian Income Fund have been my picks for this type of fund. Looking ahead, I expect the BMO fund to continue to deliver above-average returns with below-average volatility. I also expect it to continue to generate decent cash flow for investors, without significant capital erosion.
Fund company: BMO Investments
Fund type: Canadian Dividend & Income Equity
Style: Large Cap Blend
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Excellent
Manager: Kevin Hall since October 2002; Michelle Robitaille since June 2003
MER: 2.37%
Fund code: GGF619 (front-end load)
Minimum investment: $500
Courtesy Fundata Canada Inc. © 2015. Brian Bridger, CFA, FRM, is Director, Analytics & Dataand Reid Bakeris Manager, Analytics & Data at Fundata Canada Inc.This article is not intended as personalized investment advice. Investments mentioned are not guaranteed, involve risk of loss, and are subject to commissions.
