The recent fat kid on the mutual fund street that everyone likes to make fun of has been the BMO Monthly Income Fund. If you read other financial blogs and big papers you’ll read that the fund has a large return of capital in its distributions, that they will have to cut their .06 cents per unit and that it’s a horrible investment.
When I was writing my book three years ago I used the BMO Monthly Income Fund as great “Zero Effort Portfolio”. I liked it’s .06 a unit monthly distribution, how it is naturally built as a 50% dividend equity and 50% corporate/ gov’t bond balanced portfolio and how it only dropped 13.9% in 2008 when the entire market went down 33%. It has a reasonable 1.57% MER and you can wander into any BMO branch and buy it for novice investors. Starting to contribute with a simple $50 a month, newbies can get excited about money, watching the monthly income add to their pot!
In my book I wrote that if you had $100,000 divided by the $8 a unit you’d have 12,500 shares that each paid .06 or $750 a month. I decided to sharpen my pencil and see how it has done by crunching the numbers. There is fear that these distributions are unsustainable but BMO reports that most investors, re-invest the money and don’t draw from the fund. The fund only had a net drain on cash flow in 2008 when people were fleeing the market because of the crash. I’d keep an eye on it but here is how it’s done for me in the last three years. I don’t own it by the way!
If you held it since I wrote the book that would have generated $27,000 in yield after three years. The share prices have gone from $8 a share in September 2009 t0 $7.30 as of today. You would be down $8,750 on your $100,000 but up $27,000 in your distributions giving you a $18,250 profit in three years.
Now if you had re-invested your $750 monthly at an average $7.65 a unit you’d now have an extra 3,529 units and a payout of $961.76 monthly buying you 131 more units a month. One of the most popular ETFS from iShares XIU has a reported 4.41% return in the last three years compared to the BMO Monthly Income Funds’ reported 5.54% on the BMO web site.
If someone had bought my book and gone with the BMO Monthly Income Fund they would have been ahead of the game compared with what has been a more popular buy – XIU or TSX top 60 companies by market cap. Sometimes you just need to do the math and see how well you’re doing. Listening to or following the heard can end up being the wrong decision for you and your money.
Keep loving your money and have an awesome week,
Dave
