BMO Guardian Monthly Dividend Fund

Analysis: Over the past several months we have been emphasizing the importance of dividends and their impact on the total return that an investor earns. One fund that can provide a steady stream of dividend income is the BMO Guardian Monthly Dividend Fund, managed by the team of John Priestman and Kevin Hall.

Unlike other dividend funds which invest predominantly in common shares, this fund is focused on preferred shares. In fact, it is mandated that it must hold at least 50% in preferreds. As a result, it tends to be more conservative than its peer group, both in terms of risk and return. For the five years ending February 29, the fund returned 3.6%, outpacing the S&P/TSX Composite Index which gained 2.2% and the category average of 2.9%. The fund was also significantly less volatile than the index and the peer group. Even in 2008 when the markets were hit hard, it held up relatively well, losing 20%, compared to the 33% loss of the index.

Looking forward, our biggest concern is that preferreds in general will be hit hard in a rising interest rate environment. We spoke with manager Kevin Hall regarding the fund’s positioning and he assures us that the fund is fairly well positioned. The exposure to preferred shares has been declining for the past year, and is currently sitting at just over 60%. It is expected that this will continue to decline in the near term.

They have also reduced the exposure to the longer duration perpetual preferred shares, which will be hit the hardest in a rising rate environment. The fund’s weighting has been cut from 10% to 7% and can be reduced to 0%, if necessary. The fund’s exposure to high yielding common shares and REITs has been increasing, which should help protect the fund in a rising rate environment.

That said, we would expect that this fund will underperform a more traditional dividend fund in a market rally. However, over the long term, the risk adjusted returns should be comparable.

There is a monthly distribution of $0.035 per unit, which equates to an annualized yield of approximately 3.9%. Given the yield on the underlying share portfolio it is expected that with modest capital gains, the distribution is sustainable.

Costs are reasonable with an MER of 1.45% for the classic units and 2.11% for the mutual units, both of which are below the category median.

This is a good fund for more conservative investors seeking some exposure to the equity markets. It should provide better downside protection than a pure dividend fund, but will likely underperform in a rising market environment.