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Gordon Pape: A little-known 7.4 per cent yielding blue chip ETF that I like a lot

Rising interest rates are both good and bad news for income investors. On the plus side, they could eventually lead to better rates from the banks on guaranteed investment certificates, which are still a popular choice for many people.

The downside is the negative effect that higher interest rates have on bond prices and interest-sensitive securities, such as real estate investment trusts and utility stocks.

So where can you find some decent income stocks that aren't vulnerable to rising interest rates? One of my brokers, Jeff Finkelstein of RBC Dominion Securities Inc., came up with an idea that I like very much.

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He is buying units in Brand Leaders Plus Income ETF. This is a small ($37.7-million) fund from a company called Harvest Portfolio Group. It's an equal weighted, currency-hedged portfolio of 20 blue-chip U.S. multinational corporations with a minimum market cap of $10-billion (U.S.), although the actual valuations are much higher. The managers use covered call options on 33 per cent of the securities to generate additional cash flow beyond the dividends received. (In a covered call strategy, the investor holds a long position in an asset and "writes" – sells – call options on that same asset in an attempt to generate more income.)

Here are the details:

Current price: $8.81 (Canadian)

Annual payout: 65 cents

Yield: 7.4 per cent

Management fee: 0.75 per cent

Risk: Higher risk

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The fund has been around since July, 2014, but got off to a slow start. The price dropped to well below $8 in early 2016. It has gradually trended higher since then, closing on Aug. 22 at $8.81.

The portfolio roster reads like a who's who of U.S. blue-chip stocks. You'll find names such as Walt Disney Co., Intel Corp., Citigroup Inc., Johnson & Johnson, McDonald's Corp., Visa Inc., PepsiCo Inc., 3M Co., Nike Inc., Apple Inc., IBM, JPMorgan Chase & Co., Microsoft Corp., Starbucks Corp., etc. There is only one European company – Royal Dutch Shell PLC.

These are not interest-sensitive securities. Rather, they are economically sensitive, meaning that when GDP is growing they tend to do well. Much of their earnings come from overseas operations, providing exposure to economies that, in many cases, are growing at a faster pace than the United States.

Because of the way it is structured, this ETF is unlikely to produce significant capital gains. But the cash flow is very attractive. The managers target a monthly distribution of 5.42 cents a unit (65 cents a year) and so far they have delivered. That works out to a yield of 7.4 per cent based on the Aug. 22 closing price.

There is also a tax break here if the units are held in a non-registered account. In 2016, the entire distribution was treated as return of capital, meaning no tax was payable for the year. The cost base of the units is adjusted accordingly, resulting in a larger capital gain when and if they are sold.

This fund is attractive for readers who want more exposure to U.S. blue-chip stocks and are seeking above-average cash flow. There is also a U.S. dollar version available, trading as HBF.U-TSX.

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One word of caution. Because of its small size, this is a thinly traded security. Daily volume rarely exceeds 10,000 units. So place a limit order and be prepared to wait for a fill.

Discuss this recommendation with your financial adviser before making a decision.

Disclosure: The author owns units of this ETF.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.

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About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

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