From the mutual fund world comes an overlooked friend to the DIY dividend investor.
There's only a small crop of Series D Canadian dividend mutual funds, but they're well worth a look for the investor who wants a dividend-focused portfolio conveniently packaged into fund form. The exchange-traded fund world offers lots of good options and they're rounded up in the segment of my 2016 ETF Buyers' Guide covering income funds. A D-series mutual fund is a pricier alternative for sure, but you may be surprised how much cheaper it is than a conventional mutual fund. You may also not be aware of how some D-series dividend funds have outperformed the S&P/TSX composite index over the long term.
The D-series fund, available from a growing number of fund firms that includes Bank of Montreal, Beutel Goodman, Scotiabank, RBC, Mackenzie and Invesco, is designed to be held by DIY investors in an online brokerage account. The management expense ratio for these funds is reduced compared with conventional funds to reflect the fact that unitholders get no advice. BMO Dividend A has an MER of 1.8 per cent, while the D version is at 1.19 per cent. RBC Canadian Dividend A has an MER of 1.76 per cent, while the D version is at 1.21 per cent.
Dividend funds are an area where mutual-fund managers do some of their best work. A notable example is Beutel Goodman Canadian Dividend D, which has a 10-year compound average annual return to Aug. 31 of 7.6 per cent, compared with 4.9 per cent for the S&P/TSX total return index. Another good example is RBC Canadian Dividend. The D version doesn't go back 10 years, but the A version does. It made 5.5 per cent annually over the past 10 years, which projects out to 6 per cent if you reduce the fee to what the D fund now charges.
While the MERs for D-series mutual funds are higher than ETFs, you won't pay any brokerage commissions to buy or sell them. That makes D series dividend funds ideal for preauthorized contribution plans. They're also a good fit for tax-free savings accounts, particularly for people seeking total returns built on a combination of dividend income and capital appreciation.
If you're mainly interested in dividend income, you'll find ETFs offer more transparency in terms of yield and the role that return of capital plays in the income paid out. Dividend ETFs are also more likely to offer monthly income.