Having saved for many years after paying off our mortgage and helping our children with university, my husband and I now have about $1-million to invest. Most of this money, which also includes an inheritance, is sitting in a high-interest savings account exchange-traded fund. We are both 71 and semi-retired, and now have more time to devote to investing. I wonder if putting half of our assets in dividend stocks is a good idea. If so, should I replicate your own model dividend portfolio, and keep the other half in the HISA ETF or guaranteed investment certificates? I am terrified to do this without an honest view from someone like you.
Let me offer some general comments that I hope will help you decide the best approach given your risk tolerance and goals.
First, there’s no need to be terrified. A 50-50 split between equities and cash or fixed-income is a relatively conservative approach. It will provide you with plenty of “sleep-at-night” money while giving you exposure to the potentially higher returns of stocks, albeit with greater volatility that equities entail. Assuming you can achieve an average yield of 4.5 per cent, which should be easily doable, a $1-million portfolio would generate $45,000 in pretax income without eroding your capital.
If you and your husband are also receiving Canada Pension Plan and Old Age Security benefits – which may well be the case given your ages – that will provide another layer of security. Your paid-off home offers yet another safety net. In a worst-case scenario, you could tap your home equity through a reverse mortgage or credit line, although I doubt it would ever come to that.
So, the good news is that you appear to be on very solid financial footing. However, I do have some reservations about the specifics of your asset-allocation plan.
I’ll start with your question about replicating my model Yield Hog Dividend Growth Portfolio. (View the portfolio online at tgam.ca/dividendportfolio.) When I started the portfolio six years ago, my goal was to provide a real-time demonstration of dividend growth investing, including the financial and emotional benefits of seeing one’s income grow and the importance of reinvesting dividends (assuming the income isn’t needed for living expenses).
What I didn’t intend was for people to copy my portfolio exactly. There are many great dividend stocks that aren’t in the model portfolio, and a stock’s inclusion in the portfolio doesn’t necessarily mean I would buy it at today’s prices. What’s more, not everyone wants to manage a portfolio of individual securities. If that sounds like you, consider buying an exchange-traded fund that holds a basket of Canadian dividend stocks. For some suggestions, see my column titled “Five dividend ETFs to help you through the market madness.”
Another reason not to copy the model portfolio exactly is that it is narrowly focused on the Canadian market. For proper diversification, I recommend that investors also hold U.S. stocks or, even better, exchange-traded funds that provide exposure to the broader U.S. economy, including sectors such as information technology that aren’t generally known for paying big dividends.
In my own personal portfolio, for example, I hold the BMO S&P 500 Index ETF (ZSP), which invests in the 500 largest U.S. companies and charges a management expense ratio of 0.09 per cent. The iShares Core S&P 500 Index ETF (XUS) is a similar product with an identical MER. Both ZSP and XUS trade on the Toronto Stock Exchange in Canadian dollars, which saves investors the expense of converting their cash into U.S. dollars to get exposure to the U.S. market.
Note, however, that changes in the U.S.-Canada exchange rate will still affect the price of these funds. (For investors who want to minimize currency volatility, ETF companies including BMO, iShares, Vanguard and Horizons also offer currency-hedged versions of their S&P 500 funds. However, the returns of hedged ETFs have lagged those of plain-vanilla funds and, unless you are expecting a steep rise in the loonie, I don’t see a compelling reason to buy a currency-hedged ETF.)
Another concern I have relates to HISA ETFs. These popular products trade on a stock exchange and pool investors’ funds in savings accounts at the big banks, which allows them to earn wholesale interest rates that are higher than the rates on conventional high-interest savings accounts. However, unlike regular HISAs, HISA ETFs are not covered by Canada Deposit Insurance Corp. What’s more, the Office of the Superintendent of Financial Institutions is reviewing how banks classify HISA ETFs for liquidity purposes, with an announcement expected this month. If OSFI decides to tweak the rules, it could cause HISA ETFs to lower their rates.
While the risks with HISA ETFs are small, there’s something to be said for knowing that your capital is protected. As an alternative to HISA ETFs, most discount brokers offer investment savings accounts that pay slightly lower yields but are insured by CDIC. Another plus is that investment savings accounts automatically reinvest interest, which isn’t always the case with HISA ETFs. To add some juice to your returns, you could always purchase some guaranteed investment certificates. Building a GIC ladder with maturities ranging from, say, one to three years, will give you access to a portion of your money each year and also control the risk of having all of your GICs come due when interest rates may be low.
Whether you choose GICs, a high-interest savings account, or a combination, I strongly suggest that you visit cdic.ca to get familiar with CDIC’s coverage limits so that you don’t inadvertently exceed the $100,000 maximum per insured category at each financial institution.
Finally, whatever path you decide, try to keep your portfolio simple. I’ve given you a lot of ideas, but a few basic building blocks is really all you need. A balanced portfolio will generate a steady and growing income, while also providing some ballast to the stock market’s day-to-day fluctuations. After all, the last thing you want in your golden years is to worry about what the market is doing on any particular day.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl