Lower for longer is where we’re at when it comes to the world of interest rates we live in.
Gone are the days you could buy some government bonds or GIC’s when you retire and let the guaranteed income stream roll in.
Today, the 10 year Government of Canada bond pays a whopping 1.33%. Said another way, if you were looking for secure income and wanted to lend the Canadian government a million bucks, you’d get a whopping $13,000 in interest payments each year and then your million back in 10 years. On this date in 1990, that same million would earn you a respectable $97,500 each year and back in January 1980, you were paid about $110,000 (11% per year).
Options?
Accepting the interest rate from bonds as-is, may make sense for some people. If you’re the type of investor that’s deep in retirement and has zero interest or trust in the capital markets, zero willingness to take on any portfolio risk and zero need for income from your portfolio, then yeah, a portfolio yielding 1’ish percent may be right up your alley.
For everyone else, taking on slightly more risk to generate more income works, if you understand the trade off.
So what might a more aggressive but still reasonably conservative portfolio look like? Here’s an example of a portfolio that’s still pretty conservative but first….
…..the usual disclaimer about the following info and company names not being recommendations and consulting with your investment person before you make decisions, which, by the way, if you need an independent and unbiased investment person, I. KNOW. A. GUY…...
The following portfolio is:
20% GIC’s
18% Bonds
20% Preferred Shares
42% Equities
And looks a little something like:
Ok so a few points, firstly, not all equities are created equal. With clients I speak to, it’s super common to lump equities into one giant homogenous basket, which really isn’t accurate. The utility company that operates the majority of Ontario’s electric transmission grid is a “stock” just as much as the more volatile commodity or tech companies you may know of, but has a way different business risk profile. You’ll see a handful of utility companies in the list, which are there because of their super stable, predictable (and often monopoly) businesses.
Also in the list, are some mega-large cap companies (Apple, Microsoft), which pay a dividend that is expected to grow on a yearly basis and offsets the flat interest payments generated by the bond part of the portfolio. While we’re on the topic of bonds, the highly rated bonds along with the GIC’s offset the very modest position in high-yield bonds.
Finally, sprinkling in some preferred shares of the minimum rate-reset type, makes sense in this example. The minimum rate-reset feature means that if interest rates plummet at the time the dividend is scheduled to reset, those securities maintain a minimum dividend payment and protect the value of the preferred share compared to ones that don’t have the feature.
Better than bonds?
If the comparison is lending money at 1.33% over 10 years, then the answer is definitively, yes.