What makes you buy BMO Monthly Income fund? Is it the income to the detriment of stock appreciation? How does it fit in your investing strategy? Does are questions you should ask yourself when it comes to many mutual funds.
When seeking dividend income, there comes a day when you have to make a decision on what income investment you should buy. There is a set of questions I get regularly when sharing my dividend income and it ranges from ‘How much I have invested?’ to ‘What is the yield on my account?’. In general, the market yield of a diversified portfolio is around 3.50% (mine is at 3.11% at the time of writing). Since the yield is a simple formula and we make the assumption of 3.50% as an average yield, you can easily approximate the market value of anyone sharing their dividend income. I’ll let you do the math on mine …
The subsequent discussions tend to move towards dividend income vs stock appreciation and the impact on the total return of a portfolio. The challenge here is that if you focus on dividend income with high yield, you tend to forgo stock appreciation. That’s not something you want in your early years. I made that mistake very early on with many income trust where I had a good dividend income but my portfolio was not growing much outside of the dividend I received. This is something I also experience with a monthly income mutual fund in the early 2000.
I needed to make a change while sticking with dividend investing as my investing strategy. That’s when I discovered dividend growth investing which grows my portfolio value while paying me a decent income. I also established two phases with my investing approach consisting of the accumulation phase and the income phase. Depending on the size of your portfolio, you may not need to switch to the income phase which consist of moving your holdings towards higher yield investments rather than growth stocks to supplement your income.
In one discussion, the topic of the yield on the BMO Monthly Income Fund came up and while investors are often told to avoid mutual funds due to high MER, this person was confused as the BMO Monthly Income Fund is providing good income, so why avoid it?
BMO vs BMO Monthly Income
There is a saying with respect to mutual funds that you should buy the mutual fund company over its mutual fund products. Have a look at the following data points I put together. The date ranges between January 1, 2009 and December 31, 2016 with a purchase of $1,000 made early each year for a total of $8,000.
|BMO (TSE:BMO, NYSE:BMO)||BMO Monthly Income Fund|
|Unrealized Gains (Tax)||$10,681||$2,429|
For simplicity, I tracked fractional shares with BMO simulating the investment with Computershare and it makes it comparable to the mutual fund which tracks partial shares as well.
From an income perspective, the BMO Monthly Income Fund does better than BMO but from a total return perspective, BMO is a far superior dividend growth investment. The next steps in the analysis would be to assess the tax implication in a taxable account and that’s where it gets really complicated since it depends on your personal taxes. As it happens, BMO pays qualified dividends whereas BMO Monthly Income Fund pays a distribution which can include interest, return of capital or even capital gains (see dividends vs distributions). What you are left with can vary once you consider the tax implication.
Here are the stock and fund appreciation graph for the 8 year span.