Unlocking cash flow with return of capital
Many individuals rely on their investments to deliver steady cash flow to support their retirement or other income needs. However, amid a historically low interest-rate environment, this can be challenging. Fortunately, by investing in solutions that include return of capital (ROC), creating a reliable stream of cash flow doesn’t have to be complicated.
Stocks and bonds generate cash flows in different ways. Stocks may pay dividends and, as they appreciate, they also generate capital gains that are realized when you sell them. Bonds can also generate capital gains and are a good source of interest income. When buying these securities through a mutual fund, you would receive a mixture of interest income, dividends and capital gains. These cash flows may fluctuate month over month or fall short of the cash flow you’re seeking. But certain mutual funds include ROC as part of their monthly payout to unitholders, allowing for a more predictable, tax-efficient stream of cash flow.
ROC is a tax term used to describe distributions paid to unitholders that are in excess of a fund’s earnings (i.e., interest income, dividends and capital gains). For tax purposes, ROC represents a return to investors of a portion of their own invested capital in the form of a non-taxable distribution. However, these distributions also lower investors’ adjusted cost base (ACB), which may increase capital gains or reduce capital losses when they eventually sell their units.
Here are the main benefits of ROC:
This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017
Tip: start with the least flexible income sources first
How to use the ‘Bucket Approach’ to manage
your retirement portfolio
Investing and risk will always have a close relationship.