As we sit at 40-year interest rate lows, it is not hard to understand why the search is on for alternate investments that pay a higher yield. And there are plenty of new investment products being introduced weekly that hope to fill the gap. Monthly high income funds have enjoyed much popularity recently, mostly because of their very positive returns during a time of declining interest rates and poorly performing stock markets.

There are many different versions of the monthly income fund. Most have some combination of income trusts, bonds, dividend-paying common and preferred shares, and short-term cash investments.

Income trusts have been one of the best performing investments during the last few years. Within this asset class, there are many different types of businesses. They range from oil and gas to real estate to pet food manufacturers. They are designed to produce a steady income flow, which is typically distributed monthly to unit holders. Usually a portion of that monthly distribution is considered a return of capital, which means the income is not taxable. The combination of tax-advantaged cash flow and rates of return that are considerably greater than current term deposit returns has resulted in a significant increase in the holdings of income trusts by Canadian investors.

But, as always, earning higher returns than term deposits provide necessitates taking more risk. There is no free ride, and that is why it’s important to have a professional fund manager separating the wheat from the chaff. Ideally, fund managers want income trusts to be dull, boring companies with extremely predictable cash flow and strong management teams who know how to control expenses. There is little emphasis put on the growth opportunities of these businesses. Consistency of returns is their mantra. Our experience is that the managers who run the monthly income funds we recommend are seasoned, maintain a low profile, and believe strongly in the preservation of clients’ capital — all attributes we, as your advisors, seek out and admire. Another desirable trait of monthly high income funds is that they tend not to correlate closely with other investments, particularly equity funds. That means they can be used to effectively diversify an investment portfolio, resulting in less risk for the investor.

Dividend-paying shares have also enjoyed a resurgence in popularity as interest rates have dropped. Dividends from Canadian corporations attract a lower rate of tax than interest income, and for those common stocks that pay dividends, there is also the good chance that the stock price and the dividend will increase over time. For example, the dividend on Bank of Nova Scotia stock when stock splits are taken into account has risen from 44 cents in 1989 to $1.48 in 2002. Bonds and term deposits, while less risky, do not have the possibility for income growth.

Yes, dull and boring are back in vogue. That is not to say that everything in your portfolio should put you to sleep, just enough so you can sleep.