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Rate hikes are hitting Canadians hard. The economy appears to be slowing. Job layoffs are on the rise. Holders of variable rate mortgages are being squeezed. And conservatively invested portfolios are being stung.
My Income Investor RRIF portfolio hasn’t escaped. For a while, it appeared that inflation was dropping quickly, and the need for more rate increases was over. Unfortunately, that’s not the way it turned out. The central banks kept hiking, and the value of our investments suffered.
Our model RRIF portfolio was created in February 2013 with an initial value of $49,910.30. So we now have 10 1/2 years of experience with it. It’s been a bumpy ride, especially in the past two years.
This portfolio differs from an RRSP in two fundamental ways. First, it is designed to be lower risk. RRIF investors are in their retirement years, and preservation of capital becomes more important as a result.
Second, the portfolio should generate income to provide cash for the annual withdrawals. That means focusing on securities with good yields as opposed to those that depend on capital gains for investor returns. Right now, that’s a bad place to be because these securities tend to be interest-sensitive.
Here are the current positions with a commentary on how they have fared since the last review in February. Prices are as of the close on Aug. 25.
EQ Bank GICs. A year ago, we invested $8,343.95 in a one-year GIC at 4.4% from EQ Bank that matured in mid-August. We received $8,711.08 at maturity.
At the time of the last review in February, we invested another $11,683.70 in a six-month GIC with EQ that paid 3.6% annualized. It has also matured, for a total amount of $11,894.01.
iShares Core Balanced ETF Portfolio (TSX: XBAL). This is a fund of funds that invests in eight basic iShares ETFs. The current mix of about 62% stocks, 38% bonds, and a small amount of cash. It’s been a rough time for bonds and interest-sensitive stocks, but the units managed a small gain of $0.20 in the latest period. We received two quarterly distributions totaling $0.286 per unit.
Royal Bank of Canada Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BO (TSX: RY.PR.S). This preferred was added two and a half years ago. It produced a total return of 30% in its first year, but the shares have weakened since and lost $0.82 in the latest period. The quarterly dividend is $0.30 ($1.20 per year). The next reset date is this coming fall.
Granite REIT (TSX: GRT.UN). This REIT operates the properties of Magna International and has diversified into other areas. REITs have been hard hit by rising interest rates and fears of a recession, and Granite has not escaped. It lost $12.24 per unit in the latest period, wiping out our previous gains. We received distributions of $1.602 per unit.
BCE Inc. (TSX, NYSE: BCE). BCE shares continue to be depressed by rising interest rates and lost $5.46 in the latest period. We received two dividend distributions for a total of $1.975.
Pembina Pipeline Corp. (TSX, NYSE: PPL). Pembina shares lost $4.43 in the latest six-month period. The quarterly dividend was increased to $0.6675 in June. We received two payments totaling $1.32 per share.
Brookfield Infrastructure Partners LP (TSX: BIP.UN, NYSE: BIP). This limited partnership invests in infrastructure projects around the world. The shares were down $3.75 in the latest period. We received two distributions totaling US$0.765.
Firm Capital Mortgage Investment Corp. (TSX: FC). Like most of the holdings in this portfolio, the share price continues to be hurt by rising interest rates. The stock price dropped $1.27 in the latest period. But we continue to collect a steady monthly dividend of $0.078 ($0.936 a year), with a small year-end top-up in December. That’s a yield of 8.7% at the current price.
iShares S&P/TSX Capped Utilities Index ETF (TSX: XUT). This ETF invests in a portfolio of utilities stocks traded on the TSX. The units lost $1.77 in the latest six months. We received distributions totaling $0.628 per unit.
Toronto-Dominion Bank (TSX, NYSE: TD). We added 100 shares of TD to the portfolio last year at this time. It hasn’t gone as expected. Bank shares have fallen on fears a recession. As a result, we lost 19% on this investment since adding it to the portfolio. The banks will recover, but right now it’s painful. We received two quarterly dividends of $0.96 each. The yield is 4.8%, very high for Canada’s number-two bank.
Cash. We deposited retained earnings of $1,536.55 with Saven Financial, which was paying 2.85% on its high-interest savings account. We earned $21.90 in interest.
Here’s a look at the RRIF Portfolio as it stood at the close of trading on Aug. 25. Note that commissions are not deducted. Although this is a RRIF portfolio, withdrawals are not factored in, as this would make it impossible to track performance accurately.
Interest-sensitive stocks continue to be rocked by rising rates, and all our holdings were down except the GIC investments and the iShares Core Balanced ETF Portfolio.
As of Aug. 25, the total value (market price plus retained earnings) was $82,494.63 compared with $86,832.76 in February. That represents a loss of about 5% for the portfolio in the latest six months.
Since inception 10 1/2 years ago, we have a cumulative total return of 65.2%. That works out to an average annual compound rate of return of 4.9%. Our target is in the 5% to 6% range, so we are slightly below the goal.
I would add one point. As I mentioned at the outset, one of the key objectives of a RRIF is to generate cash flow. This portfolio is doing that, with most of our equities producing better-than-average yields. These securities have slipped in value, but that is primarily due to rising interest rates. All are sound companies, and their share prices will recover when the current rate cycle ends.
This continues to be very difficult market, especially for conservative portfolios. The Bank of Canada has signaled there could be more rate hikes coming if inflation doesn’t return to the target range and hold there. Investors must prepare for that possibility.
In this situation, cash is king. Therefore, we will put all the money from the maturing GICs, a total of $20,605.09, into the CI High Interest Saving ETF (TSX: CSAV). It holds deposit accounts in Canada’s major banks and is currently yielding 5.3% based on the August distribution of $0.221. Of course, there is no guarantee the payment will continue at that level but based on what we’re hearing from the Bank of Canada, interest rate cuts are unlikely this year unless we plunge into a deep recession. If that happens, we can quickly sell CSAV and redeploy the money elsewhere.
The ETF is trading at $50.04. We will buy 410 units for a cost of $20,516.40. We will add the balance of $88.69 to cash.
With our equity holdings trading at what look to be bargain prices, we’ll use retained earnings to add to our positions as follows.
RY.PR.S – We’ll buy another 20 shares for $398. We now own 290 shares, with $88 remaining in the retained earnings column.
BIP.UN – We have enough cash to buy 10 units at a price of $43.25, for an outlay of $432.50. We now own 210 units, with retained earnings of $260.50.
FC – We will add another 40 shares of Firm Capital at $10.75, for a total payout of $430. That will give us 540 shares. Our retained earnings will fall to $19.12.
XUT – Finally, we will purchase 10 units of XUT at $26.07 for a cost of $260.70. We now own 180 units. We will take $1.98 from the cash account to make up the difference.
We have cash and retained earnings of $3,071.03, which we will deposit in a Motive Savvy Savings Account, which is paying 4.1%.
Here is the revised portfolio. I will revisit it in my Income Investor newsletter February.
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. Subscribe now to receive a free copy of the special report “The Tumultuous Twenties.”
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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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