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It’s a new year, but there is still a backlog of readers’ questions from 2022, so let’s deal with some of them in this column and the next.
Q – I hold Firm Capital Mortgage Investment Corp. (TSX: FC) in my RRIF, and I am becoming increasingly concerned. My cost is $14.03, so I am down about 24%. Of course, I love the income, but the market appears to be saying that it is at risk. Being in a RRIF, there is not even an opportunity for tax loss selling. Would appreciate your guidance. – Richard I.
A – This is a long-running story with this company. Firm Capital is a mortgage investment corporation, which means it is highly interest-rate sensitive. The share price will rise when interest rates fall and vice-versa. I have always encouraged readers to focus on the dependable cash flow, which hasn’t changed in years, and ignore the month-to-month price movements. I encourage you to do the same.
The company reported third-quarter earnings of $8.2 million, an increase of 8.1% from the same period last year. No sign of any financial distress there.
If you can’t live with the ups and downs, then wait for the next interest rate cycle and sell when the shares get close to your cost price. But frankly, I’d keep it for the dependable cash flow.
Q – I read in The Globe and Mail about inflation-linked bonds. Do you have any thoughts about them? Any recommendations? – John M.
A – These bonds are issued by governments and both the principal and interest payments are protected against inflation. Sounds like a winning combination, but things are not always what they seem. The FTSE Russell Real Return Bond Index was down 13.81% for 2022. The iShares Canadian Real Return Bond Index ETF (TSX: XRB) lost 14.14%.
One of the problems with XRB is that it’s a long-dated fund with a weighted average maturity of 16.43 years and a real yield of 1.41%. That’s not a combination that’s likely to attract investors.
Another difficulty with these bonds in general is that investors don’t receive the inflation bonus on the principal until the bond matures. That could be many years in the future, and a lot can happen in the interim.
If you want to invest in this sector of the bond market, I advise staying short term. In September, my Income Investor newsletter recommended the iShares 0-5 Years TIPS Bond Index ETF (TS: XSTP) for risk-averse investors. Since then, it has recorded a small capital gain of $0.41 and received distributions of $0.556. The gain on the original recommended price is about 2.4% in a little over three months. It’s not a lot, but it’s on the plus side of the ledger. A word of caution if cash flow is important to you: The fund makes monthly distributions, but they are erratic and twice recently there has been no monthly payout at all.
As always, before investing in any of these securities, consult with your financial advisor to make sure they fit your risk-tolerance profile and financial objectives.
Q – I have a bit more than a million in retirement savings. I’m 64 years old. I've been watching Dividend 15 Split Corp. (TSX: DFN) with a 15% monthly dividend payout. Can you think of a reason why I shouldn't just put everything into that and receive a monthly dividend in excess of $12,500? – Marc L.
A – Sounds too good to be true, doesn’t it? So, let’s take a closer look. This is a split corporation based on the S&P/TSX 60 Index. It’s been around for many years and is well-managed. The shares pay a monthly distribution of $0.10 ($1.20 a year), which works out to a yield of 15.9% at a recent price of $7.53. What could go wrong? The share price, that’s what.
Earlier this year, the stock hit a 12-month high of $8.83. If you’d had the misfortune to buy at that point, your million dollars would now be worth about $853,000. Yes, you’d have the dividends, but your capital would have taken a hit.
In short, it’s not risk free. Weigh the pros and cons carefully. The advice I always offer in these circumstances is: Don’t put all your money in one place.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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