GICs are a big problem-solver for investors seeking competitive yields and security, but this rule is a little less true than usual today.
Guaranteed investment certificates issued by alternative banks and trust companies typically offer yields that are better than government and investment-grade corporate bonds, with pretty much zero risk because of the availability of deposit insurance. But right now, there are a few investment-grade corporate bonds with yields that edge out alternative GICs. Warning: These bonds are riskier than GICs protected by deposit insurance. But held in a diversified portfolio of bonds and/or GICs, they can help you modestly boost your overall yield.
First, let's establish a yield range for alternative GICs. One online brokerage firm's selection of third-party GICs tops out at 1.96 per cent for two years, 2 per cent for three years, 2.1 per cent for four years and 2.3 per cent for five years. You might be able to get roughly 0.2 of a point more from other firms if you deal with them directly.
Next, let's see what investment-grade corporate bonds we can find with better yields:
- Canadian Natural Resources 3.05% June 19, 2019: This bond offered a yield of 2.9 per cent as of mid-April. The credit rating was BBB-high, a couple of notches above the BBB-low floor for investment grade. As with most bonds these days, this one trades at levels above the price investors will receive on maturity.
- Ford Canada 2.92% Sept. 16, 2020: These BBB-rated bonds yield 2.5 per cent based on a price just above par.
- Canadian Real Estate Trust 2.56% Nov. 30, 2019: The yield is 2.5 per cent based on a price a little above par. Rated BBB.
- Canadian Western Bank 2.5% March 22, 2018: The yield is 2.3 per cent, based on a price just above par. Rated A-low.
One thing to remember about GICs is the lack of liquidity – you can't easily sell before maturity, unlike a bond. Torn between GICs and corporate bonds? Use GICs as a reference yield and substitute corporate bonds only when you can get a comfortable mix of higher yield and quality. For example, you might set a floor of a BBB-high credit rating on any corporate bonds you consider.