What is an income fund?

What is an income fund?

An income fund is a mutual fund or exchange traded fund (ETF) that generates monthly or quarterly cash flow. They focus on stable payouts rather than price appreciation.

“Income fund” is a broad term that the covers several different types of funds:

  • Money market funds
  • Bond funds
  • REIT income funds
  • Dividend funds

There are other, more nuanced funds, but we’ll focus on these four to get you started.

Let’s dive in…

Safety focused income funds

There’s always risk when investing, but some investments do a better job of protecting your money. In exchange for relative safety, you sacrifice yield. Lower risk investments may not produce the cash flow you were hoping for.

Money Market funds

Money market funds are usually made up of Certificates of Deposits and treasury bills.

A certificate of deposit (CD) is a promise your bank makes to give you a specific return on your savings. In return, you promise to not withdraw any of that cash until the maturity date. It’s like an accelerated savings account with better interest, but a lot more restrictions on your cash.

Treasury bills (T-bills) are auctioned off by governments when they want to raise money for specific projects. They come in $1000 portions and promise to pay you a specific interest rate until that maturity (usually a year).

A fund with CDs and T-bills is seen as relatively low risk, although the returns will be fairly conservative as well.

For Example:

* This is not a recommendation, just a small example of what’s available.

Scotia Money Market Fund Series A

Assets Under ManagementMinimum Investment5 Year Return
$149.48 Million$5000.56%

Bond funds

Buying government bonds is seen as one of the safer investment strategies. Many income funds will invest in a vast array of government and corporate bonds. Again, the goal is consistent payout.

Usually bonds don’t pay as well as most dividend stocks and they don’t appreciate in value too much (if at all).

Although at the time of writing, Canadian 10 year government bonds yield about 3.4%. That’s better than some dividend paying companies, with less volatility than stocks.

Bond focused income funds build a portfolio of bonds from various governments and private sectors. That way they can offer diversification as well as a consistent pay out. But don’t expect much price appreciation.

For Example:

* This is not a recommendation, just a small example of what’s available.

RBC Monthly Income Fund

Assets Under ManagementMinimum Investment5 Year Return
$942.63 Million$5000.20%

Cash flow focused income funds

If you’re ok with a bit more price volatility and you’re hoping for a bit more cash flow, then you can investigate Real Estate Investment Trusts (REITs) and Dividend Funds.

REIT Income funds

As real estate investors, we all got into this game for cash flow. Many big real estate developers or investment corporations will take their portfolios public and allow shares to be traded on the stock market. Hence REITs.

The rules say these REITs must pay 90% of their dividend income to shareholders. So REIT can be a place to find cash flow in the stock market that is backed by real estate.

Of course, REITs are subject to the real estate business cycles as well as the stock market volatility. So REIT share prices will fluctuate a lot more than property prices.

For Example:

* This is not a recommendation, just a small example of what’s available.

Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE)

Assets Under ManagementUnit (Share) Price (06 / 24)Annual Distribution (Dividend) Yield
$278.04 Million$30.053.66%

Dividend Funds

Many companies pay quarterly dividends to shareholders. These payments are a fraction of the share price. What many dividend investors will look for is “dividend yield,” the percentage of the payout compared to the share price.

For example, if the stock is $100 and the company pays a $3 / share dividend, their yield at that time is 3%.

What dividend funds do is invest in a portfolio of dividend paying companies and let investors buy shares in their portfolio.

This gives you the advantage of diversification without needing to buy shares in all of those companies yourself.

Also, you don’t have to worry about balancing and rebalancing a portfolio to maximize dividend payments. That’s the fund manager’s job.

Any dividends the fund earns is paid to shareholders.

For Example:

* This is not a recommendation, just a small example of what’s available.

iShares Canadian Financial Monthly Income ETF (TSX: FIE)

Assets Under ManagementUnit (Share) Price (06 / 24)Annual Distribution (Dividend) Yield
$851.20 Million$6.857.05%

What do I do with this information?

How much risk do you want to take on? (Although a good question to ask is how much risk you’re actually taking on when buying into low yield investments.)

Is the yield worth the risk?

It’s good to research what each fund invests in. What are their portfolios made of? Are you comfortable with their investments?

From here you can make a better decision about where you feel most comfortable putting your money.

And many of these investments can be bought in RRSPs and TFSAs, giving you some tax advantages as well.

If you want to dive into more about dividend stocks, make sure to read our breakdown here.

That’s all for now.

Happy trading,

Your fellow Stock Hackers,

🍒Cherry & Erwin

P.S. The market dropped almost 20% between January and June this year. Many are worried it could keep going. Will the market crash? What are you supposed to do if it does crash? We unpack all of these questions in our latest FREE report, “What to do if the Market Crashes in 2022.” Download your free copy now!

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