There are two ways to invest in an income portfolio. The first is to build it yourself (or have your adviser do it), by accumulating high-quality dividend-paying securities such as BCE Inc., Fortis Inc., TC Energy Corp., some real estate investment trusts and similar securities.
The second option is to pick one off the shelf, in the form of a ready-made mutual fund or ETF portfolio. There are lots from which to choose.
My experience has been that a carefully constructed portfolio will provide a better return over time. But that involves more work and is more expensive than purchasing a single fund.
If one-stop shopping is your preference, here is an exchange-traded fund to consider.
Horizons Active Cdn Dividend ETF (HAL)
Recent price: $18.25
Annual payout: 52 cents (trailing 12 months)
Yield: 2.8 per cent
Risk rating: Moderate
The security: This is an actively managed ETF that invests in a portfolio of North American securities (mainly Canadian) that pay above-average dividends. Guardian Capital acts as the subadviser for the fund, using a proprietary model that screens stocks on the basis of dividend growth, payout ratio and sustainability.
Why I like it: The portfolio is well diversified. Blue-chip stocks include Royal Bank of Canada, Enbridge Inc., TC Energy and Brookfield Asset Management Inc. But there are also several smaller high-yielding companies such as Capital Power Corp., Summit Industrial Income REIT and Parkland Fuel Corp.
The portfolio avoids overconcentration in any one sector and is not a mirror image of the S&P/TSX Composite Index by any means. Utilities are the largest sector, at 19.1 per cent, compared with 4.7 per cent for the index. Financial services are next at 18.5 per cent, compared with 33 per cent for the index. Energy accounts for 14.9 per cent of the portfolio (16.2 per cent for the index), while the real estate weighting is 13.7 per cent compared with 3.6 per cent for the S&P/TSX.
The end result is a portfolio that is highly sensitive to interest rates.
Performance: This interest sensitivity has contributed to the fund’s recent strong performance. Although the Bank of Canada stood pat, the U.S. Federal Reserve Board cut its key rate three times this year, and that pushed down commercial rates both in the United States and here.
That helped to boost the performance of this ETF. The year-to-date return to Oct. 31 was 22 per cent, outperforming the S&P/TSX. Since inception in 2010, the ETF has generated an average annual return of just over 9 per cent.
Distribution policy: Payments are made quarterly. They had been running at about 12 cents a unit until the October payment, which was just over 14 cents. If that were to be maintained over the next 12 months, the yield would be about 3.1 per cent. However, to be on the conservative side, I have used the trailing 12-month distributions for the yield calculation.
Risks: The stock market. This is an all-equity portfolio, so if the market takes a hit, the value of the fund will decline. However, the defensive nature of the portfolio suggests the fund will fare better than the broad market in a downturn.
Key metrics: The fund was launched in February, 2010, and has $44.5-million in assets under management. The management fee is 0.55 per cent, plus tax.
Who it’s for: This is a useful choice for investors looking for a well-managed, quality Canadian dividend portfolio.
How to buy: The fund trades on the TSX but volume is small – about 8,000 units a day over the past year. I suggest you enter a limit order and be patient.
Summing up: This is a good choice for income-oriented investors who don’t want to build their own portfolio. Ask your financial adviser whether it is suitable for you.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.