A lifetime of inflation-protected income. That’s the dream nearly all investors share. Luckily, for most of us who are alive today, there’s probably never been a better time than right now to start making that dream a reality.
There’s an old Chinese proverb that says, may you live in interesting times. That’s definitely a fitting description for where we find ourselves today. For one thing, it seems like half of Europe is struggling to reign in its spending while simultaneously fighting an uphill battle for solvency. Investors have begun shunning European bonds, and their own citizens are closing their accounts and draining their banks of much-needed funds.
In Canada (and even more so in the United States), we are still experiencing stubbornly slow growth and high unemployment. Global stock markets spent the last 10 years on a roller coaster ride that left even the most stalwart investors wondering if their patience will ever pay off.
As if all this fear and instability wasn’t bad enough, retirees who are relying on their investment capital to fund their retirement years are finding few conservative investment options beyond 5-year GICs that pay a mere 2.5%.
As a result, investors are feeling like they’re stuck between the proverbial rock and a hard place. Should they risk their capital in the equity markets, and hope for the best? Or should they try to find a way to live on the 1% or 2% interest they can garner from “safer” investments?
I would argue that there is another option. In fact, in my opinion, the only thing investors are “stuck” in these days is the unspoken idea that capital must be protected at all costs – and that protecting their capital means ensuring it never goes down in value, even for as little as a single year.
What would happen if we changed our focus from securing a specific amount of capital, to securing a steady stream of inflation-protected income, which would meet our financial needs for the rest of our lives? If you adopt an income focus rather than a capital-focused view, the investment landscape starts to look a whole lot different.
Bank of Montreal common shares, for example, are paying a dividend of more than 5% – nearly double that of many GICs. Convertible bond indexes are also paying interest in the same 5% ballpark. And the Exchange Traded Fund (ETF) that represents the Dow Jones Canadian Dividend Index is paying out more than 4%.
The good news doesn’t end there. Not only are stocks offering considerably higher income potential than those so-called “safe” investments, they also let you hold on to more of that income when the tax man cometh. Because of the way dividend income is treated in Canada, a 4% dividend yield would net you the same after-tax income as a GIC that paid 5.5% in interest – assuming you could find one.
Of course, investors can be forgiven for being a little gun shy when it comes to publicly-traded stocks. The markets, to put it mildly, have not been kind lately. It’s tough to find the courage to put your toe back in the water when it looks like there might be hungry sharks still circling about.
The only way to counteract that fear is to consider the facts. Stocks represent Corporations. And unlike most Governments, publicly-traded Corporations have more cash on their balance sheets right now than at any other time in history.
Because they’re so flush, most of those Corporations are looking to increase their dividends, not cut them. For investors who want to secure their income – both now and in the future – the choice is clear.
You can buy bonds, which pay next to nothing, have no chance of future growth and which come with the added bonus of a higher tax rate on what little income they do offer. Or you can invest in stocks, which are currently paying more income with less tax, and which offer the prospect of significant long-term growth. Growth that will include growing dividends and, eventually, a potentially substantial increase in capital.
To me, it’s a no-brainer. If you’re ready to change your point of view from securing your capital to securing your future income, you might agree that there’s never been a better time to own a well-diversified portfolio of stocks.
Alan MacDonald an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.