A new dividend fund with plenty of promise

Som Seif thinks he has created the best dividend fund ever.

So who is Som Seif, you may be wondering, and what gives him the right to make such an ambitious claim?

He is the dynamic, self-assured CEO of a fund company you’ve probably never heard of: Purpose Investments. Prior to that, he was the founder and president of Claymore Investments, a cutting-edge exchange traded fund (ETF) business that was bought out in 2012 by BlackRock Canada, owners of the iShares product line.

While at Claymore, Seif conceived what is now the iShares S&P/TSX Canadian Dividend Aristocrats Dividend Index ETF, which trades on the Toronto Stock Exchange under the symbol CDZ. To qualify for inclusion, securities must be listed on the TSX and in the S&P Canada Broad Market Index, have increased ordinary cash dividends for at least five consecutive years, and have a market cap of $300 million or more.

This approach does not create a portfolio of big banks and utilities, as you might expect. Instead, the fund is dominated by small and mid-size companies such as Bird Construction, Exchange Income Corp., Northern Property REIT and Wi-LAN.

The fund produced a five-year average annual total return of 11 per cent to June 30. During the second quarter, monthly payments were about $0.08 per unit which, if sustained, would work out to a yield of 3.8 per cent over a full year.

That’s pretty good for a dividend fund, but now Mr. Seif believes his new idea is even better. His latest baby is called the Purpose Core Dividend Fund, which his company optimistically proclaims is “the only dividend fund you’ll ever need.” It differs from other dividend funds in several ways.

For starters, whereas most dividend funds have a single-country focus, this one holds securities from both Canada and the U.S., with a current percentage split of 52/45 in favour of Canada, with the rest in cash. Second, the securities selection process is rather unusual. Instead of concentrating primarily on stocks with a strong dividend history, the managers also assess a company’s ability to sustain the current level of payments and grow them in the future. “We’re prepared to sacrifice a higher yield now for the probability that the company’s dividend will increase at an above-average rate in the future,” Seif says.

Diversification is another key goal of the fund. Canadian dividend funds tend to be heavily overweighted to financial and energy stocks, reflecting the sector breakdown of the TSX. For example, the flagship dividend funds of RBC, TD, and CIBC all have more than 60 per cent of their assets in those two categories, and they aren’t alone. Most dividend investors, who tend to be conservative by nature, are unaware of the high degree of sector risk they are incurring in such funds.

The Purpose fund spreads sector risk by scattering the 40 dividend stocks that best meet its criteria across a range of categories. Financials and energy combined account for about 26 per cent of total assets, well below their TSX weighting. Real estate (14.8 per cent), consumer discretionary (12.8 per cent), utilities (12.2 per cent) and industrials (9.4 per cent) are the other major sectors represented.

The net result is an unusual mix of companies for a fund of this type. Top holdings include Darden Restaurants (Olive Garden, Longhorn Steakhouse, etc.), Las Vegas Sands, Camden Property Trust, Telus and Lockheed Martin. No single position represents more than 2.83 per cent of the total.

The final point that makes this product unusual is that it is offered both as a mutual fund and an ETF. You can buy it on the stock exchange (symbol PDF) with a management fee of 0.55 per cent. If you prefer to spend more money, the series A mutual fund units carry a 1.55 per cent management fee, with the extra percentage point going into your adviser’s pocket as a trailer. The series F mutual fund units for fee-based accounts have the same fee as the ETF.

So how has this offbeat fund performed? It’s difficult to judge because we have very little history to work with — the fund was launched in September 2013. Over the year to June 30, it posted a gain of 2.73 per cent, which looks unimpressive until you compare it to the -0.35per-cent average for the Canadian Dividend and Income Equity category for the same period. The cash flow is currently $0.065 per month, which translates into a yield of 3.17 per cent based on a recent price of $24.57.

I’m not keen on rushing into new products until they have had time to prove themselves. But this concept looks promising, so keep an eye on it. Som Seif may have done it again. Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is BuildingWealth.ca. Follow Gordon Pape on Twitter @GPUpdates.