Five fixes for yield-starved investors

With some "high-interest" savings accounts paying less than 1 per cent and Canada Savings Bonds yielding a puny 0.4 per cent - the nerve! - these are lean times for conservative, income-seeking investors.

But here's the good news: If you're prepared to take on a little more risk, you can kick sand in the face of those scrawny returns. That's right. Even with today's ultralow interest rates, you can give your portfolio some extra income muscle, and you won't have to put your financial health in jeopardy.

Here are five ways to pump up the yield of your portfolio, along with some of the pitfalls to watch out for.

Dividend-paying stocks

Even though stock markets have come roaring back since the financial crisis, there are still plenty of tempting dividend yields out there. Many of these companies are appropriate for conservative investors.

A prime example is pipeline operator Enbridge Inc., which is yielding 3.6 per cent and has a long history of dividend growth. A staple of income portfolios, Enbridge's regulated pipeline and utility businesses throw off steady cash flows and the company benefits from growth in the oil sands.

"The place I tell people they have to go is to dividend-paying stocks, even though there's no guarantee on the principal," says Norman Levine, managing director, Portfolio Management Corp. "I believe it's a risk worth taking, as long as you buy quality stocks where the dividend is well covered by earnings."

Another favourite of risk-averse investors is pipeline and power company TransCanada Corp., which currently yields 4.6 per cent. Even juicier yields can be found in the telecom sector, where BCE Inc. pays 6.2 per cent and Telus Corp. yields 5.6 per cent. The wild card here is how much these companies will be hurt by new competitors entering the wireless space.

And, of course, our Canadian banks are legendary dividend payers. Currently, the average yield among the Big Five is 4.4 per cent

Corporate bonds

Had a look at government bonds lately? Ouch. The yields are so low it hardly seems worth the effort. But you can improve your yield, without taking on excessive risk, by shopping in the corporate sector.

"I've been buying high-grade corporate bonds," says Harry Koza, senior market analyst for Thomson Reuters. He owns Shaw Communications Inc., TransAlta Corp. and Canadian Natural Resources Ltd., among other bonds.

"I stay away from junk bonds. I just want to buy it and forget about it."

Buying individual bonds can be intimidating for do-it-yourself investors, who have to understand complex yield-to-maturity calculations and call features. What's more, retail customers don't get the best price because they buy in small quantities.

One alternative is to buy an exchange-traded fund such as the iShares CDN Corporate Bond Index Fund, which invests in more than 300 bonds across various industries and has a low management expense ratio of 0.4 per cent.

Another option is the Claymore Laddered Corporate Bond ETF, which has an MER of 0.25 per cent and holds 25 bonds with maturities ranging from one to five years. Corporate bond ETFs "are a great way of doing it," says Mr. Koza, who owns both ETFs. "They're better than a bond mutual fund, because the MER is tiny."

One drawback of bond ETFs is that they never mature, so they lack the certainty of an individual bond that returns its principal on a certain date. For investors, this means that, if interest rates rise, the ETF may be down in price when they need their money. But the low costs and instant diversification are a big plus.

Income trusts

Even as the clock ticks down to the new income trust tax in 2011, some investors like this sector for the rich yields available. John Stephenson, portfolio manager at First Asset Investment Management and author of Shell Shocked: How Canadians Can Invest After the Collapse, is especially fond of Keyera Facilities Income Fund and Inter Pipeline Fund.

Keyera, which gathers, processes, stores and transports natural gas and liquids, yields 9.1 per cent. Inter Pipeline, which ships a big chunk of oil sands volume and owns other energy infrastructure assets, yields 8.9 per cent. Both funds have said they expect to maintain distributions at current levels after 2011.

"Either one of these is defensive, and I think it's definitely an area where people can get some yield without going too far out on the risk curve," Mr. Stephenson says.

Robert Cable, director of wealth management with ScotiaMcLeod, also uses Inter Pipeline in his "conservative high-income portfolio" for clients. "People are starved for income," he says. "They don't want a lot of risk."

REITS

Real estate investment trusts, which own shopping centres, office buildings, apartments and other income-producing assets, are still trading well off their pre-credit crisis highs and are sporting some eye-catching yields.

Examples include RioCan REIT (currently yielding 7.9 per cent), Canadian REIT (5.4 per cent) and Boardwalk REIT (4.8 per cent). Many REITs will also be exempt from the new trust rules in 2011.

Still, some money managers remain cautious on the sector, fearing that REITs could suffer if the economy stays weak and consumers sit on their wallets.

"I just don't think there's a golden age ahead for REITs. But they've got steady distributions and for people who are buying and holding and collecting the distributions, I think that's a decent part of your portfolio," says Todd Johnson, associate portfolio manager with BCV Asset Management.

GIC Ladders

If you can't stand the idea of watching your capital sink by even a few bucks, you can always build a ladder of GICs with terms of one through five years. According to my discount broker, the highest rate available on a five-year GIC right now is 3.3 per cent, falling to a high of 1.35 per cent for a one-year term.

By laddering, or staggering, your GICs, you'll always be reinvesting your maturing investments at the prevailing five-year rate, and you'll avoid a situation where all of your money becomes available when rates are low.

You'll also make a heck of a lot more than you would with a lowly CSB or savings account.

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Hunting for yield