Join Fund Library now and get free access to personalized features to help you manage your investments.
More money questions from readers, answered.
Q – I have a significant amount of my RRSP invested in Purpose High Interest Savings ETF (TSX: PSA) as the more conservative part of my total portfolio. The yield still seems quite good despite reducing interest rates, but I expect it will eventually fall as interest rates fall.
Do you believe I should be shifting this money into bond ETFs and REITs now? Please consider that this is an area of my portfolio where I would like to take less risk but would like to target a similar return to PSA if possible, around 5%. – Name withheld by request
A – This is really a question about how to have your cake and eat it too. Returns on “safe” securities like deposit accounts, money market funds, cash-based ETFs, and GICs are falling. So, where can you find a similar return with comparable low risk? Answer: nowhere.
Let’s start with the PSA fund. If you look at the distribution history, you’ll see the monthly payouts have been trending down since the Bank of Canada started cutting rates. In May, investors received $0.221 per unit for a yield of slightly over 5% based on the trading price at that time. The September distribution was $0.167.
The units trade in a narrow range ($50-$50.24 over the past year) and will likely continue to do so. The yield would be 4% based on the September distribution and a recent price of $50.10. The monthly payouts vary, so that number will vary, but the yield trendline over the next 12 months will likely be down.
So, what about your other suggestions? The bond market recovery is quite uneven, due to the effects created by the inverted yield curve of the past two years. That is now correcting itself, but a 5% yield on any bond ETF is unlikely, unless it’s a high-yield (junk) bond fund. If you’re willing to go that route, check out the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY). The year-to-date gain to Oct. 30 was 6.08%. But be wary. This ETF has a history of volatility, and the 10-year average annual compound rate of return to Oct. 30 is only 3.08%.
As for REITs, there are several with yields above 5%. But they carry a measure of risk that may go beyond what you are willing to accept.
Your safest move would be to invest in a GIC from a smaller institution. You won’t get 5%, but Duca Credit Union was recently offering 4.25% on a five-year term. Go to ratehub.ca for more information.
Q – Most of the articles I read are about building wealth. I’m suddenly at the other end of life and not sure how to manage my Canadian dividend portfolio.
I think my small ($65k) portfolio of 22 Canadian dividend stocks is performing slightly better than the available dividend ETFs, with no management fee. The dividend distribution is certainly a little higher than the common ETFs, but it will not be enough to cover my expenses. So, at various future points I'll be faced with decisions about which holding to sell.
What criteria should I use? How do I make those “sell” decisions?
Or – and I hate to take apart what I’ve built – should I sell it all and put the money into one or two ETFs and draw them down as needed? – Bill C.
A – I think you have too many positions for such a small portfolio. Based on your numbers, the average size of any given holding is less than $3,000. This means you probably spent more on commissions than necessary when building the portfolio, and it will cost you more when you sell. Fortunately, the fact it is outperforming likely offsets that.
The sell decisions should focus on retaining those stocks that are doing best, in terms of total returns. Don’t focus on yield alone. Keep the stocks that have given you the best combination of dividends and capital gains. The stocks at the top of the pyramid should be the last to go.
If you have a money question you’d like answered, send it to gordonpape@hotmail.com and write Fund Library Question on the subject line. I can’t guarantee a personal response but I’ll answer as many questions as possible in this space.
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.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 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.
Image: iStock.com/juststock
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
