News

The stock market is up close to 30 per cent since March, but you've hardly missed a thing by doing nothing.

Not if your goal is to buy some bargain-priced stocks and corporate bonds to build a retirement portfolio that could keep you going even if the stock markets gave you little or nothing in the years ahead.

In the depths of the stock market plunge last fall, this column presented an idea from the financial advice firm TriDelta Financial Partners: Buy high-yield stocks, preferred shares and corporate bonds to build a pension-like retirement portfolio. Eight months later, with the markets looking shaky after a spring surge, there's still an opportunity to lock in yields of roughly 5 to 10 per cent or more.

“If your goal is to set up a well-diversified, high-income portfolio, now is a very good time,” said Ted Rechtshaffen, president of TriDelta and a certified financial planner.

There are several good reasons to revisit the concept of the high-yield retirement portfolio. For one thing, it's worth monitoring the advice that investment people gave in the dark days of last fall. Look for more of this in future Portfolio Strategy columns.

Also, Mr. Rechtshaffen sees a new role for the high-yield retirement portfolio in replacing or augmenting company pensions. He argues that if you're leaving a company, you might well be better off by converting your pension into a locked-in retirement fund (LIRA) and investing it in high-yield stocks.

Still another reason to revisit the high-yield retirement portfolio is that investors are more open to buying beaten-down stocks than they were when the global financial crisis was at its peak.

“We talked to a lot of people about this in November, and we probably had a couple of people who actually did it,” Mr. Rechtshaffen said. “That's because, psychologically, the world seemed to be coming to an end. Today, it's an easier discussion.”

The basic concept of the high-yield retirement portfolio is to take advantage of dividend-paying stocks and corporate bonds that have fallen hard in price. As a stock or bond falls in price, the return you get from its total annual dividends or interest payments rises.

TriDelta last November offered a sample selection of stocks and bonds that might work in this context, and the yield for the group back then was 8.3 per cent. The yield on those same securities was 7.8 per cent this week.

“Clearly, from a yield perspective, there is still a window,” Mr. Rechtshaffen said.

TriDelta has calculated that a retired couple would need a yield of 6.5 per cent to indefinitely wring a combined $45,000 in after-tax annual income from $500,000 held in a registered retirement income fund. The inflation rate was assumed to be 2.5 per cent, and the annual RRIF withdrawals are increased over time to reflect this.

There's been a lot of talk lately about the stock markets falling back after their recent rally, and Mr. Rechtshaffen buys into this view.

Long term, though, it's reasonable to expect returns of 6 to 8 per cent annually on average from stocks. For the 20 years to June 30, the S&P/TSX composite made 7.7 per cent a year, with dividends included.

The high-yield retirement portfolio could give you nothing in terms of capital gains and still work, though. All you require is that the stocks and bonds it contains keep paying dividends and interest.

An interruption in this flow of income is the big risk when investing in high-yielding securities, and the stocks highlighted by TriDelta have not been immune.

TriDelta included nine different dividend stocks, preferred shares and corporate bonds and one, Yellow Pages Income Fund, cut its payout. Instead of providing $1.17 per unit each month, this income trust now pays 80 cents, or almost 32 per cent less.

“Yellow Pages has been a terrible investment, but it's still a cash cow that makes a profit every quarter and probably will for quite a while,” Mr. Rechtshaffen said.

Over all, the nine securities highlighted by TriDelta have risen 3.6 per cent in price over the past eight months and generated an additional 5.5 per cent in income. The total return of 9.1 per cent compares with about 10 per cent for the S&P/TSX composite, including dividends. That's a solid performance, given that the securities chosen by TriDelta portfolio are almost half comprised of somewhat tame preferred shares and bonds.

With its regular payments of dividends and interest, the high-yield retirement portfolio will ideally function like a pension fund. In fact, Mr. Rechtshaffen believes it can be a better option than an actual pension fund in certain cases.

One is where you're leaving a company and faced with the choice of keeping your money in your pension plan or removing it and putting it in a locked-in retirement account, or LIRA, where you can invest in almost anything.

The TriDelta view is that you shouldn't touch your money if you're a member of a government pension plan or a solid entity like Ontario Teachers Pension Plan.

If you work for a private company, he suggests you think hard about taking your pension money with you.

“If it turns out that you work for almost any private company, this is a better option,” he said. “There are very few companies that you can say with certainty will be in great shape for the next 20 years.”

The high-yield retirement strategy could also be worth a look if your company has a defined contribution pension plan, Mr. Rechtshaffen said. That's where the amount contributed by you and your employer is set out specifically, but the actual level of benefits depends on the performance of your investments.

In some defined contribution plans, members can transfer their own contributions into a personal account after a set period of time. Mr. Rechtshaffen says it could be worthwhile to do this if your defined contribution plan requires you to buy high-fee mutual funds, or to base a significant portion of your savings in company stock.

Just to be clear, Mr. Rechtshaffen recommends you participate in a defined contribution pension plan if your employer also makes contributions.

“We tell people that if you have a company pension plan and there's any meaningful matching, you do it. But that doesn't necessarily mean you have to keep the money in the plan.”