Income For Retirees

It is difficult in general, to say what the best sources of yield or income are for retirees that are entering the drawdown stage of life. For many people, their investments provide the income they require to live life and pay their bills. However are the best sources of income the highest yielding investments? For individuals, is it as simple as owning the highest dividend or interest paying investments out there in the market place?

In my opinion, I don't believe that is the case. For example we know that the second tier of dividend payers (not the highest dividend payers) outperform the first tier on a regular basis. The highest dividend payers often run into problems maintaining the higher rate and thus, often have to reduce their payouts which can spell disaster for the share price of those companies. The second tier dividend payers maintain their dividend payouts more easily and thus exhibit less volatility in comparison. Thus, in many cases the best source of yield is not the highest yield.

Before an investor can decide the best source of yield for themselves, they have to decide on the risk they are willing to take. Are they more comfortable with low risk investments or are they okay with chasing a possible higher rate of return or dividend rate, but have to take on more risk to do so? A medium risk portfolio may yield more, but there will be more volatility as well.

There are always risks to any portfolio. With a lower risk portfolio that tends to gravitate to more fixed income like products, the risk is with interest rate fluctuation. As interest rates move higher, the price of investments such as bonds and preferred shares tend to fall. With medium or higher risk investments that are traded on the stock exchange, the risk is that the value of the investment can fall with the overall market sentiment. Thus medium risk investments that are invested in equities (you can have higher risk bonds as well) are subject to market risk, whereas low risk bonds have to be concerned with interest rate sensitivity.

Today, with interest rates so low, many believe that the only direction for interest rates is higher. Investors, including myself, believe that the 10 year government bond rate will rise above the 3% mark both here and in the US at some point in the not too distant future. Therefore are bonds or even preferred shares a good investment today for investors seeking lower risk knowing full well that the value of the bonds and preferred shares will fall in the future? Should investors, seeking higher yield, look to the equity or stock market for greater payouts but risk losing money with the ups and downs of the stock market?

In my opinion, with the environment that we are in today, a balanced approach makes most sense. Like many aspects of life such as lifestyle or diet, balance always makes sense. Thus, why would your investments be any different? If you are in the drawdown stage of life, you are probably no longer working and thus cannot or should not take the same risks as someone who is younger and earning an income. Thus inside the portfolio, there should be a large component of lower risk investments like preferred shares or corporate bonds. I would own corporate bonds over government bonds as the yields tend to be higher. Preferred shares (depending on what type of preferred shares) can pay out to investors 4% to 5% dividends on an annual basis. That is a great yield for those looking to stay in a low risk investment but want to maximize the yield as much as possible. Investment grade bonds (BBB+ or higher) depending on the length of the bond can pay in the 3% to 4% range (if you were to consider bonds that mature in the 6 to 10 year range).

On the equity side, I would consider dividend paying stocks in the utilities, bank, telecom and pipelines sector. There are companies in these sectors that tend to be a little less volatile than the market as a whole, but have yields that are higher than investment grade corporate or government bonds.

The risk that the retiree is willing to take will dictate the percentage of the portfolio that would be in dividend paying equities vs. fixed income bonds or preferred shares. The other factor that goes into determining the mix of assets in the portfolio is the desired yield or income the retiree requires. If the retiree needs a yield of 5%, they will not be able to attain this with government bonds or GIC's.

In today's environment, with equities in many cases paying out higher dividends than the interest rates bonds are paying and with interest rates rising at some point down the road, I think it is possible for retirees to incorporate income generating stocks into their portfolio. Income generating stocks will provide both a higher yield in many instances and help hedge the portfolio against higher interest rates. Perhaps a retiree should incorporate 20% or 25% into dividend paying equities in their portfolio (depending on their comfort level for risk). Bonds will fluctuate with interest rates, but eventually if the investor holds the bond to maturity, they will receive their money back plus interest. Thus in the long term, there is no risk of loss unless the bond defaults on the payment. By owning investment grade bonds, the risk of that happening is minimal. The type of preferred shares you own will dictate the volatility with this asset class. Perpetual preferred shares versus Reset preferred shares as an example. An investor must understand what type of preferred share they own and how it works if they are going to include this investment in their portfolio. In general, preferred shares can add good yield to a lower risk portfolio.

In summary, the best source of yield for retirees revolves around having a balanced portfolio made up of both equities and fixed income products to hedge against market risk and interest rate risk and to provide a higher average yield to the investor. Chasing the highest yielding investments is never a good strategy. Owning a mix of investments that have good yields and that are in different asset classes is the best way to make money and hedge against risk in the current investment environment.

This article was prepared solely by Allan Small who is a registered representative of HollisWealthTM (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Allan Small alone and not those of HollisWealth.

A Great Time To Be An Investor

Now that the Federal Reserve has made their announcement of QE3, what is the next event to take this market to the next level? We have seen the major North American stock markets rally with the expectation of Fed stimulus in both Europe and the United States and the market was not disappointed. So what’s next for investors? Should they take profits at this time with no new additional catalyst in site?

My quick answer is no. With the Federal Reserve in the U.S. about to embark on further easing measures which according to Ben Bernanke the head of the Federal Reserve, will last until the economy gets “a lot” better, how can investors not be in this market if you are looking to grow your wealth? You couple the Federal Reserves statements out of the U.S. with the most recent stimulative statements out of China and Europe and in my opinion, you have the makings of a fantastic stock market rally!

We have already seen the major U.S. stock markets rally this year tremendously. All three major indices are up double digits year to date even in the face of all the negativity coming out of the United States and around the world. This to me, seems like a runaway train that investors should be getting behind not in front of.

The interesting part of this rally is that many retail investors have not taken part in it. I believe investors for whatever reason have chosen to ignore the markets rally and focus more on the negative headlines coming out in Europe and other places around the world. In speaking with investors, they mention that they believe the worst is yet to come. However the stock market in North America continues to climb that wall of worry each day and especially in the United States continues to rally.

So for all the investors that continuously wait for all the storm clouds to disappear before they invest, I wish you good luck! In my opinion, there will always be storm clouds on the horizon. They will never fully go away. Thus investors cannot afford to wait for something that I feel will never be before they decide to invest. I believe you need to buy low to eventually sell high as the saying goes. However it is painfully obvious that many individuals continue to do the opposite. They buy after the market has its run (buy at higher levels) and then they sell after the market corrects and pulls back from its high point (sell low).

In my opinion, this market remains cheap based on the alternatives investors have to not being in the stock market. Investments in GIC’s, government bonds and high interest savings accounts are paying on average less than 2.5% (approximate level of inflation). Thus if you are “playing it safe” and are not in the equity markets, there is a very good chance your money is not growing fast enough to keep up with the rising costs (standard of living) around you.

North American Markets Show Their Resiliency

How resilient have the North American markets been over the past few months? Many investors and analysts have been speaking recently about how the stock markets in the U.S. and Canada have struggled this past quarter. I on the other hand look at it differently! I consider all the negative news and poor economic data from seemingly every corner of the globe and still our stock market is relatively flat for the year and the U.S. markets are much higher! What more as investors, could we ask for?

Why have our markets in North America faired as well as they have recently? I believe it’s because the world once again is awash with stimulus measures. For those central banks that have not yet begun to stimulate their economies as of late, (Federal Reserve in U.S.) many are anticipating them to do so shortly. We have seen in past years that when central banks from China to the United States, from Brazil to the U.K. all stimulate their economies, the global market reacts positively. This is the main reason why in my opinion, our stock markets have continued to remain resilient here in North America.

Another major factor why investors continue to buy equities (stocks) in the face of a global slowdown is that there are in my opinion no other options to grow your money today. With interest rates on GIC’s and bonds at or near historic lows, an investor looking to grow their wealth cannot consider these types of investments. They simply don’t pay enough.

With the earnings season just starting, it will be very interesting to see if the stock market can remain resilient and move higher. The expectations for corporate earnings have come down dramatically over the past month for the second quarter. Thus, surpassing analyst’s expectations may not be too hard however investors will need to look at how the company is doing in relation to its past quarters as well.

I continue to be positive on the markets. As many of you know, I like to look at the glass as half full not half empty. There are major challenges facing economies today that in my opinion won’t go away easily such as the Euro debt crisis, a slowing growth story in China and U.S. employment and housing issues. However I believe that there will always be storm clouds on the horizon. If investors wait for all the storm clouds to leave before they invest they may never do so. With interest rates low around the world and possibly going lower, I feel that today may be one of the best times to invest especially for longer term investors.

Buy The Dips And Sell The Rips

“Buy the Dips and sell the Rips”! A phrase I heard from a trader this past week. Buying investments after they have come down (Buy the Dips) and selling them once they have moved higher (Sell the Rips); this is what many traders apparently are doing over the last few months. Is this why this market has been range bound over the past year?

Until this market can show some conviction to the upside, the trading community in my opinion continues to sell into market strength. I believe traders and institutional investors have no clue as to where this market is headed and thus are reluctant to stay long (hold on to a position) overnight let alone a weekend. While most of us here in North America are fast asleep, important headlines are being released in Asia and Europe which can take the global markets for a roller coaster ride. Thus by the time we wake up each morning, the markets can easily be up or down triple digits. Traders are reluctant to stay in a position when they are not able to predict what will happen overnight.

After the month that we have just gone through where the major North American markets dropped about 7%, traders and institutional investors which in my opinion control the direction of the stock market (due to the large amounts of many under their care or management), are even more uncertain. I have heard some opinions by analysts in the U.S. that their markets are now in “Oversold Territory”. Usually, when you have enough investors with this belief, the market eventually rallies. However will this rally be any stronger or longer than some of the rallies we have seen over the last few years? When you look back at the major U.S. indices for example, you will notice that they are pretty much where they were last summer. Thus the more things have changed, the more they have stayed the same.

I believe the saying “buy the dips and sell the rips” is a great endorsement for dividend paying investments. If traders are taking this market up and down and thus individuals are really not getting any further ahead, the only way to make money is by purchasing investments that pay dividends. I feel that the market at some point will supply the conviction needed for traders to stay long this market (believe the market with go higher). However until that day comes, the main way and possibly only way to have relevant gains in a portfolio is for individuals to buy investments that pay dividends. In my opinion it is not difficult to find good quality names paying between 4% and 6% today.

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