A Yield to Caution

Article Excerpt

CANOE EIT INCOME FUND $13 (Toronto symbol EIT.UN; Units o/s: 153.9 million; Market cap: $2.0 billion; Divd. yield: 9.2%; www.canoefinancial.com) is a closed-end fund that invests in a portfolio of dividend paying stocks. Canadian stocks account for 51.2% of its holdings, followed by the U.S. at 40.2%. Canoe pays a monthly distribution of $0.10 a unit: the stock yields a high 9.2%. However, the fund’s yield may only be sustainable if stock markets keep rising. Canoe EIT’s portfolio does not pay enough dividend income to cover its distributions to its unitholders, after allowing for management expenses and fees. To make up the difference, the fund must trade its portfolio’s securities in pursuit of capital gains. It also aims to raise its returns by writing call options on its holdings. Selling call options generates an income stream. However, selling calls also tends to diminish any capital gains—when the stocks that the fund owns go up, holders of the call options it has sold will exercise those…