The TSX offers a variety of monthly dividend payers, from royalty trusts and split corporations to my personal favourite, exchange-traded funds (ETFs).
However, the title of “Dividend King” among monthly payers doesn’t belong to any of these contemporary options.
(Note: Dividend King here refers to what I believe is the best income asset, as opposed to the usual criteria of 50-plus years dividend growth).
Instead, I argue it’s held by a more traditional investment vehicle, a closed-end fund (CEF), which may seem a bit archaic but remains a potent choice for income-seeking investors.
The fund in the spotlight is the Canoe EIT Income Fund (TSX:EIT.UN).
With $2.7 billion in assets under management, it stands as Canada’s largest CEF and has been reliably distributing monthly income since its inception in 1997.
Here’s what you need to know before considering an investment in this longstanding fund.
How does EIT.UN work?
Although it trades like a stock, EIT.UN is essentially a fund, holding a balanced portfolio of approximately 50% Canadian stocks and 50% U.S. stocks.
This portfolio is actively managed, meaning its managers actively select and adjust its holdings rather than merely follow an index.
The primary aim of EIT.UN is to provide a consistent monthly distribution, which has been set at $0.10 per share for over a decade.
This distribution is made up of dividends, capital gains, and a return of capital, providing a multifaceted and tax-efficient approach to income generation.
Based on its current market price of $13.79 as of July 10, this results in an annualized yield of approximately 8.7%.
Now, unlike some income funds EIT.UN hasn’t been a slouch in terms of total returns either. With distributions reinvested, the fund has compounded at an annualized 10.4% over the last 10 years.
What to know before you buy
As a CEF, EIT.UN operates differently from your typical ETF, and there are several important considerations to be aware of before investing.
Firstly, the market price of EIT.UN can trade at a discount or a premium to its net asset value (NAV). It’s crucial to check this metric before buying to ensure you’re not paying above the fund’s underlying value – aim to buy at a discount.
Secondly, EIT.UN has relatively high fees; its total management expense ratio (MER) is 2.1%, which is comparable to many mutual funds. The fund’s management fee is 1.00%, but the overall MER is higher due to the fund’s use of leverage.
Essentially, EIT.UN may borrow up to 20% of its NAV to enhance returns and increase yield. This can make the fund’s returns more volatile and increase risk. The interest paid on the borrowed funds contributes to the higher MER.
