Blog: Cutting Through the Noise

Income Gone WildPrint

Posted on March 5, 2012

By Scott Ronalds

Tom’s Globe article on the weekend focused on Income Gone Wild (Dividends Obsession Distracts Investors From Big Picture). He opines that investors’ intense focus on dividends and income is distracting them from what really matters – “total” returns (i.e. capital appreciation, dividends and interest income).

Many investors are looking at yield and income first, without much consideration for the underlying components that drive returns. A product that promises a pay-out or distribution of 8% may sound great, but it’s crucial to look at how it’s generating the distribution and whether it’s sustainable. An 8% distribution doesn’t look so good if your investment falls by 10% and/or is paying you back your capital (return of capital).

Blogger Canadian Capitalist wrote a piece last month that provides a good example of investors’ fascination with yield. He noted that of all the new exchange traded funds (ETFs) launched last year, the BMO Covered Call Canadian Banks ETF attracted the most assets by a wide margin. He suggested that the fund’s initial yield of 10% was a big reason why investors piled money into the fund. Interestingly, the Covered Call ETF’s total return was lower than a plain vanilla ETF that invests in similar underlying investments but pays a lower distribution. The takeaway: higher yield doesn’t always equate to a higher return.

For income-oriented investors, yield should be a consideration when analyzing a potential investment. It shouldn’t, however, be the only consideration.