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.