Canoe Income Fund (TSE:EIT.UN) – Dividend Dream or Dud?

If you’re considering an investment in Canoe Income Fund, you’re not alone. This popular closed-end fund has attracted attention for its high dividend yield and consistent monthly distributions.

The fund pays a generous monthly distribution that has historically provided an annual yield between 9-11%. 

Before jumping in, you should understand and examine the fund’s structure, performance history, and potential drawbacks. That is precisely what I’ll be going over in this article.

My deep dive into the Canoe Income Fund (TSE:EIT.UN)

Over the years, I’ve had multiple requests to review this popular closed-end fund here in Canada, and for good reason. It’s performance has been rock-solid for an income fund, and its income stream has been incredibly resilient.

That said though, I’ll get to the dividend and performance in a bit. First, lets go over what Canoe Income Fund (TSE:EIT.UN) is.

What is Canoe EIT Income Fund?

Canoe EIT Income Fund is a investment fund traded on the Toronto Stock Exchange. It was established in 1997 and has grown to become one of Canada’s largest closed-end funds.

The fund is managed by Canoe Financial, a well-known Canadian investment firm. As a closed-end fund, it issues a fixed number of units, which are then traded on the stock exchange like stocks or exchange-traded funds.

This structure allows the fund to maintain a stable asset base, which can be advantageous for long-term investment strategies.

Lets go over some other key concepts about closed-end funds.

Key features of closed-end funds

Closed-end funds are investment funds that raise a fixed amount of capital through an initial public offering (IPO) and then trade on an exchange like a stock. 

Unlike open-end mutual funds, where shares can be created or redeemed based on investor demand and cannot be sold like stocks or ETFs, closed-ended funds have a fixed number of shares that trade on the open market.

Close-end funds have several key concepts that make them unique to mutual funds:

  1. Fixed capital: Unlike mutual funds, closed-end funds have a set number of units.
  2. Market pricing: The fund’s units trade at prices that may differ from its net asset value.
  3. Leverage: Closed-end funds can borrow money to increase potential returns.
  4. Income focus: Many closed-end funds, including Canoe EIT, prioritize generating regular income. However, this is not a requirement of any closed-end fund.

These features allow for potentially higher yields and more stable management of the fund’s assets. 

However, they also come with unique risks, such as the possibility of trading at a discount or premium to net asset value.

Canoe Income Fund’s particular investment objectives

The primary goal of Canoe EIT Income Fund is to maximize monthly distributions while also aiming to achieve the highest level of capital appreciation possible. 

The fund targets a mix of income-generating assets and growth-oriented investments, primarily in Canada and the United States. 

Canoe Income Fund’s holdings

Despite this being a Canadian-listed fund, the majority of its holdings are located in the United States. At the time of update of this article, around 51% of the portfolio is US based, 47% Canada, and around 5.5% International.

These numbers may seem a bit puzzling at first, as they add up to more than 100%. However, this is the fund utilizing a bit of leverage in an attempt to amplify returns. 

As always, you could be reading this article well beyond when I published it, and allocations could have changed. It is always best to refer to the funds website for the most up to date information.

In terms of the top equities holdings inside of the portfolio, it contains many prominent names, such as Royal Bank (TSE:RY). Visa (V), Restaurant Brands International (TSE:QSR), UnitedHealth Group (UNH), Tourmaline Oil (TSE:TOU) and Agnico Eagle Mines (TSE:AEM).

Because of its income focus, the fund is heavily concentrated in the financial and energy sector, where the bulk of high-yielding Canadian equities lie. Around 47% of the portfolio is weighted towards financials and oil and gas.

The fund mainly invests in large to mega-cap corporations, many of which would be considered blue-chips.

How has Canoe done relative to the markets?

If I were to explain the performance of Canoe Income Fund in one word, it would be “meh”. Returns haven’t necessarily been poor, but they’ve been far from market beating or even market matching.

The good? Past performance works out to around 8% annually since the early 2000s. For those who are seeking an income-based investment, this may be completely reasonable for you.

The bad? It has trailed the S&P 500 by about 2.5% annually, which over that amount of time, would lead a $100,000 investment in Canoe worth about $200,000 less than a $100,000 investment in the S&P 500.

On the flip side, the fund has outperformed the TSX. However, it only started doing so in a post-pandemic environment. For quite some time, Canoe lagged the TSX Index in terms of total returns.

Considering the fund is both a blend of US and Canadian equities, it would be unfair to entirely benchmark it to the S&P 500. This is the exact reason, in my opinion, the fund has done so-so in terms of returns over the years.

If you are not in the market for income, broader market indexes have, in the past at least, given better returns.

How solid is the distribution?

The largest draw for investors toward Canoe will be for its large distribution, which has historically yielded anywhere from 9%-11%. 

The fund pays monthly distributions, providing a regular income stream for unitholders. It’s also worth nothing that the fund is notorious for being reliable when it comes to its distribution payments.

During the financial crisis, distribution payments became a bit rocky in terms of total amounts, but were still delivered. Since then, the fund has paid out $0.10 a month, every month.

In terms of overall distribution makeup, in its most recent year the fund’s distribution contained around 13% eligible dividends, 47% capital gains, and 40% return of capital.

Depending on your overall situation as an individual, you may find this distribution makeup attractive, or not very good at all. It really all depends.

The main risks with Canoe Income Fund

Many investors adopt a mentality that income somehow means lower volatility and thus safety. This isn’t necessarily the truth. There are risks involved investing in Canoe Income Fund, much like any other mutual fund, ETF, or equity.

Supply and demand

As an open-end fund that can be traded based on market demand, the fund can, at points, trade at a premium or a discount to its net asset value. The fund trading at a discount to NAV ultimately becomes an issue when you need to sell, where the fund trading at a premium to NAV becomes an issue if you’d like to buy.

Concentration risk

As I mentioned above, Canoe is heavily concentrated in the energy and financial sectors. This does make complete sense as an income fund, as many of the premiere companies in Canada and the United States are in these sectors.

However, that doesn’t mean investors should ignore the concentration as a risk overall. Both of these sectors are relatively cyclical, meaning during economic downturns they tend to be more volatile. Make sure this type of asset mix fits within your risk tolerance before you decide to buy.

The use of leverage

Canoe typically doesn’t utilize that much leverage, but it does at points utilize some. Leverage can amplify returns, but it can also do the reverse, amplify losses.

If you’re comfortable with a small amount of leverage, this risk likely is a non-factor to you. However, if you don’t like participating in funds that do utilize leverage, no matter how small, it’s something to consider.

Distribution stability

No matter how well Canoe has done to maintain the distribution in the past, ultimately there is zero guarantee it will continue to do so in the future. With an annualized return since inception that practically equals its distribution, it is safe to say that the distribution will make up the majority, if not all, of your total returns.

For this reason, if the fund were to run into trouble and not be able to pay it, the attractiveness of the fund would no doubt decline, and it would face significant volatility.

Overall, it’s a strong fund – for some

In my opinion, Canoe does present itself as a rock-solid income option for many Canadians. And on that end of things, it hits on all fronts. 

It has managed to keep up with its $0.10 a month distribution for a very long time, and for a retiree who is looking for a steady and reliable stream of income, this is no doubt attractive.

Where I do feel the fund isn’t necessarily “wrong”, but sub-optimal from a total return perspective, is having a 50/50 split for Canadian and US equities. 

I do get it from a taxation perspective, as Canadian dividends will be taxed at a friendlier rate, and I also do get it from the perspective that the bulk of their unitholders will be Canadian with an inherent bias towards owning Canadian stocks.

However, the US markets have historically provided stronger long-term total returns over their Canadian counterparts, as the US markets have more exposure to faster growing segments of the economy.

For an investor with a longer time horizon and one that is looking to total returns, this may not be the most optimal fund.

I’d give it a solid A when it comes the income side of things, and a C+ in terms of overall performance relative to the broader indexes. As a satellite holding in a larger portfolio, I can see why the fund is attractive, no doubt.