Since the Great Financial Crisis of 2008, governments worldwide have been forced to implement accommodative fiscal and monetary policy to fuel the growth of their economies and stabilize them. This meant fixing interest rates at sub-1% levels to induce spending. As a result, borrowing money has been cheap, and inflation is high. Just as economies were reeling out of this situation, the pandemic caused another cycle of low-interest rates to be implemented, thus pushing inflation in Canada to record-high levels.
In such a scenario, personal finance decisions are more crucial than ever because the traditional formula of saving in the bank until retirement will work. However, at present, bank interest rates in Canada are hovering at sub-1% levels while inflation is around 3%. This means that bank savers will almost certainly face wealth erosion as their savings will lose purchasing power over time. Therefore, it is essential for investors today to look for other investment options like bonds, stocks, passive investment vehicles, etc., that beat inflation and grow money at an acceptable rate.
Over the past decade, low bank rates and high inflation have fuelled the explosive growth of the stock market and low-cost passive investment vehicles like bond funds/index funds/mutual funds/ETFs. They are great options for novice investors as they are managed by experts and are diversified across various sectors for lower risk. However, while bonds are safe investments with periodic payments in the form of interest, the cheap borrowing rate environment these days has led to most low to moderate risk bonds having sub-inflation or moderately above-inflation interest rates. Further, interest income is taxed at a significantly higher rate than capital gains in Canada.
Stocks are a great option for long-term wealth creation, but many do not offer investors a dividend/passive income stream, which is very important for some people. These vehicles are great options for individuals such as retirees, who need cash flow to pay bills in retirement, or parents with large families who have high expenses but need to save for retirement. These funds help these types of investors to save and grow wealth over time whilst also giving them cash flow to meet costs in the interim.
This article will look at a sub-section of passive investment vehicles, monthly income funds/ETFs. These investment vehicles provide investors with a way to benefit from the growth of their capital over time through returns on the investments and get a passive income stream from dividends paid by them every month. They are far more versatile than bonds or vehicles that automatically reinvest dividends as they give investors tax benefits, liquidity and passive income.
Best Monthly Income Investments in Canada
Here Are The Best Monthly Income Funds In Canada –
1. CIBC Monthly Income Fund
The Canadian Imperial Bank of Commerce operates this monthly income fund and is one of Canada’s biggest income funds with about C$4.4 billion in assets. The fund invests in a mix of debt and equity securities that are diversified across many industries. The CIBC fund only invests in securities issued by some of Canada’s biggest and well-run companies and has compounded wealth at 5.5% CAGR over the last 10 years, excluding dividends. The fund has a meagre expense ratio of 1.46% and a dividend yield of 5.67%. The minimum investment in the fund is C$500 initially, with subsequent investments as low as C$25. Its biggest holdings include Canadian Housing Trust bonds, RBC, TD, Enbridge, etc. The fund has been operating for the last 23 years.
2. RBC Monthly Income Fund
The RBC is of Canada’s oldest and most respected institutions. This fund is multi-asset with 50.5% in debt instruments and the rest in equity. Like most monthly income vehicles, the RBC fund invests in top-tier companies and bonds diversified across multiple industries. In addition, this fund also invests in various foreign instruments like a US Dividend Fund, thus giving investors geographical diversification and a hedge against the CAD to some extent. The biggest sector holdings in equities include financials, industrials, and energy, while the biggest sector holdings in debt include government instruments followed by high rating corporate bonds. The fund has total net assets of C$7.62 billion. Over the past 10 years, the fund has returned 5.7% CAGR, plus dividends. The dividend yield of the fund is 3.21%, and its expense ratio is 1.16%.
3. TD Monthly Income Fund
The TD Monthly Income fund is designed to deliver consistent income to investors and primarily invests in stable dividend-paying securities. The fund is multi-asset and invests in equities, debt, and cash in a 60-30-10 ratio. The fund has an AUM of C$7.82B and an expense ratio of 1.48%. The fund also holds a tiny portion of its US equities and bonds for diversification purposes. A major difference between TD’s monthly income fund and others is that it has a shallow minimum initial investment of C$100 compared to at least C$500 for most others. The fund also offers pre-authorized purchase plans for as little as C$25. Its biggest holdings are in financial services, utilities, energy, and industrials. TD’s fund is also one of the best performers in the income fund space, with a 6.48% CAGR over the last 10 years.
4. iShares Core S&P/TSX Composite High Dividend ETF
This ETF aims to emulate the S&P/TSX index for investors. The fund aims to provide investors with consistent monthly income and modest capital appreciation while keeping risk as low as possible through diversification. The fund’s biggest holdings include BCE, RBC, Enbridge, Canadian Natural Resources, TD, and TC Energy. Compared to monthly income funds, monthly income ETFs have significantly lower expense ratios. This ETF has an ultra-low expense ratio of just 0.22% and assets little over C$1B. The fund has a distribution yield of 3.93% has outperformed most monthly income funds in terms of performance with a 10-year CAGR of 7.14%. Also, unlike income funds, ETFs have no minimums, and units of this fund are available on the TSX for just under C$24.
5. Fidelity Canadian Monthly High Income ETF
The Fidelity Monthly High-Income fund is designed to give investors with a higher risk appetite a vehicle with a passive income stream and greater capital appreciation than other monthly income funds. It invests in companies with higher growth potential rather than safe-haven companies. The biggest holdings by sector include financial services, communications, energy, real estate, etc. The fund is very new, having been launched earlier this year and has only performed for the last 6-months, where it returned 11.61% YTD. The fund also has shallow assets as it has only been 9 months since its launch. It has an expense ratio of 0.59%.
6. iShares Canadian Select Dividend Index ETF
iShares Canadian Select Dividend ETF is designed to give investors the highest possible dividend yield from the Canadian securities universe whilst minimizing risk. The fund operates on a rules-based methodology that selects holdings based on high dividend yields, dividend growth over time, payout ratio, cash-flow generation, and earnings stability. The fund is one of the best performing funds in the monthly income space with an 8.35% CAGR over the past 10 years and has an expense ratio of 0.55%.
While indirect investing through these ETFs/funds is the option best suited for most investors due to its low cost and simplicity, dividend investing can be very effective for people who are serious about creating wealth and are willing to put in the effort to analyze companies with the highest potential. While investing in companies with passive income, investors must analyze some key financial metrics that inform the investor about the company’s capability to maintain and grow dividends over time. These metrics include dividend growth rate, return on equity, debt levels, cash flow generation, interest coverage ratio (a measure of how a company’s earnings match its interest expenses, higher is better), dividend history, barriers to entry, etc.
The best sectors for dividend investing are those where barriers to entry are high so that companies can protect their profit margins. High barriers to entry can be due to high capital requirements, government regulation, high customer loyalty, high switching costs, etc. Other attractive sectors are not cyclical, and demand is stable, like food and healthcare.
Some of the best companies for dividend investing are banks, utilities, food brands, hospitals, diagnostics chains, pharmaceutical companies, and REITs (companies that raise money from investors through IPOs to buy real estate and use the rent from the properties to pay dividends.
Some of the best dividend stocks in Canada include –
(Note: Yields keep fluctuating with stock prices)
- Pembina Pipeline – Dividend Yield 6.5%
- Northland Power – Dividend Yield 2.84%
- EPR REIT- Dividend Yield 5.82% (US-listed but owns most of its properties in Canada)
- Parkland Fuel – Dividend Yield 3.3%
- Granite REIT – Dividend Yield 3.75%
- TransAlta Renewables – Dividend Yield 5.27%
- First National Financial – Dividend Yield 6%
- Atrium Mortgage – Dividend Yield 8.3%
We hope you find this article helpful and consider dividend investing as it is a great way to make your money work for you and pay you over time.
Best Monthly Income Funds Canada
Canadian investors who rely on consistent long-term income generation seek out the best monthly income funds for their portfolios. The following 10 highest monthly income ETFs have traditionally delivered high yields and provide a stable monthly income distribution to complement the capital growth strategy of your investment portfolio. Sources: 9, 10
ETFs have bundled investment vehicles made up of companies that, in some cases, pay monthly distributions. These funds are like ordinary investment funds, distributing a monthly distribution, generally treated as capital gains tax. ETFs are a bit like investment funds, but it is a long-term ETF that offers all the benefits of a mutual fund in the form of an ETF. Sources: 0, 4, 8
Choosing a low-cost income fund means you can hold more of your investment returns. Income funds pay a higher percentage of their dividend income than investment funds, meaning a good income fund should have a lower expense ratio and a high return. Choosing an income fund Low cost: If you hack an income fund with lower cost ratios, you will have more than enough income from your investments to keep it in your income fund for a longer period, even if it is only a few months or even a year or two. Choose a low expense income fund: Choosing an income fund with higher expenses and lower dividends means you earn more income than if you hold more investments than you earn, regardless of the amount of income you hold. Sources: 3, 5
For example, you could invest in a monthly income fund with a lower spending ratio and higher returns than an investment fund, such as a 401 (k) or pension fund. You can set up your pension fund so that you can access your money at any time. In this example, you might be able to invest with a monthly, quarterly, or even annual income plan with less spending and fewer returns. Sources: 5, 6
ETFs do not have a minimum investment amount, while mutual funds typically require an initial investment of $1,000 or more. When choosing the best investment fund in Canada, you should know the risk potential you can take and the return potential of the fund. An equity fund carries more risk than investment funds with a lower expense ratio, such as a 401 (k) or pension fund, but it carries the same risk as an annual income plan or a monthly investment in a pension plan. Investments in equity or income funds carry a higher risk of investment failure and lower returns than an investment plan with a return program. Sources: 5, 7, 11
This means that the share price of an income fund can fluctuate significantly more than that of an exchange-traded fund, such as an equity fund or an investment fund with a lower issue ratio. This means that the share prices of income funds can fluctuate considerably less than those of equity funds and investment funds, especially exchange-traded funds (ETFs). Sources: 5
If you invest in two equity and income funds, you should ensure that the funds do not invest in the same companies. If you are investing between two shares and an income fund, you may want to ensure that both funds do not invest in the same company. If your fund is not invested in both funds and the equity fund is not invested between these two equity and income funds, you may also want to make sure that the fund does not invest in these very companies! Sources: 5
If you believe an income fund fits your investment strategy, it is important to investigate it in the same way that any other fund would. If you think it might suit an investment strategy, it is important to research income funds similarly or even better than your other funds. If you do not but think it might fit your investment strategy, it would be vital to research the income of these funds in the same way that you do for any other fund. Sources: 5
If you are looking for the best monthly income in Canada for your monthly investment strategy, you can choose between RBC, TD or one of the monthly income funds. First of all, we should not be deceived by the name of an income fund, but by its name and the type of income it provides. Sources: 1, 2
One of the best investment funds in Canada that offers high risk and potentially high returns is an investment fund that invests in emerging markets. If you are confident you can hold your capital in some of Canada’s best mutual funds, then you would be best suited to a conservative mutual fund. Sources: 11
These funds tend to carry less risk, and the returns they generate may not be as high as equity funds, but they do generate returns. This fund tends to hold more capital in bonds and shares than equity funds and carries lower risks. The returns that these funds generate may not be as high as those of equity funds – these funds tend to carry less risk, and their returns generate more returns than equities and equity funds. Sources: 5
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