A look at the “Top Dividend” stock list on the TMX website will show an investor a selection of the highest yielding investment funds and stocks available in Canada. That list features some astronomically high numbers on investment funds: yields upwards of 20%. An income-seeking investor might look at those numbers and rush to buy, believing that with a 20%+ yield, their income needs are about to be met.
As attractive as the highest-yielding investments might appear, there are a wide range of other factors for investors to consider when shopping for an income paying investment fund. Investors may want to consider the crucial details of how, when and why that yield is paid as income: as well as their own risk tolerances and investment goals. This article will outline how an investor can assess those factors when deciding what income investment fund is right for them.
Looking ‘under the hood’ of the highest-yielding investment funds
If you see a big yield sticker on an investment fund in excess of 20%, you may want to look more closely at the details of its income payments.
Because income from investment funds is not always solely derived from dividends, the income characteristics will be listed under the term “distributions.” Information like the distribution frequency and the distribution history will tell a prospective investor a great deal about a particular investment fund’s high yield.
Investment funds will pay their distributions monthly, quarterly, or annually. By looking at the distribution frequency of an investment fund, investors can assess whether an investment fund meets their particular cashflow needs.
A useful way to assess the track record of an investment fund is by looking at the distribution history page published on its website. This will show how much income was paid on each distribution. Some funds have very consistent distributions history, while others fluctuate frequently over time. The distributions history can be a useful way to assess the reliability of the income paid by an investment fund.
Assessing these characteristics can be a useful first step in deciding whether an income investment is right for you. But investors should also consider why the yield number next to an ETF is so high.
Is the high-yield number temporary?
The yield numbers next to investment funds on a resource like the TMX “Top Dividend” list reflect the most recent distribution paid by an investment fund or stock. In the case of investment funds, that distribution could have been a one-off ‘special distribution.’
A special distribution could be the result of a wide range of factors. For example, one of the fund’s holdings could have paid a significant dividend that is being passed on to unitholders. Special distributions are often accompanied by a press release.
No matter how the special distribution was derived, it is important to assess whether its yield is reflected in a fund’s regular distributions. Looking at the distributions history of an investment fund will give you some insight into whether that fund’s high yield is the result of a special distribution, and whether the fund’s regular distributions will generate a similar annualized yield.
Does an investment fund fit your goals?
An individual investor’s unique goals and objectives are key to assessing whether an investment fund is right for them. Some of the highest-yielding investment funds on the market, for example, may come with a level of risk that is outside of an investor’s risk tolerance. These funds might be invested in a sector that doesn’t align with an investor’s goals. The high yield they promise — if it is paid regularly — might not be worth the underlying risk when investment funds with more reasonable yields can meet an investor’s income needs.
Every investor is unique and has their own goals, but when considering the highest-yielding ETFs on the market, it’s important to consider a range of factors that go into that high yield and assess an investment fund’s holistic value to an individual investor.
For more on Harvest Equity Income ETFs click here.
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