We put $45,000 into a tax-free savings account with a discount broker for my 90-year-old mother. She has stocks in a separate, non-registered account that is also self-directed. Dividends from these stocks are important to her, and she would also like to generate income from the TFSA. Is it better to buy stocks such as Fortis Inc. (FTS), Algonquin Power & Utilities Corp. (AQN) or Brookfield Renewable Partners LP (BEP.UN) for the TFSA, or an exchange-traded fund? Do you need to sell ETF units to receive income? She is also fond of the Scotia Canadian Dividend Fund (fund code: BNS385), which she holds separately with an adviser who only deals in mutual funds. This adviser has recommended that she sell the Scotia fund. Do you have any advice?
Without knowing all the specifics of your mother’s situation, it is difficult to provide detailed advice. However, I can offer a few suggestions that may help.
First, let’s look at the Scotia Canadian Dividend Fund. With mutual funds, the unitholder can choose to take distributions in cash or reinvest them in the fund. The latter is typically the default option. But you should know that, even if your mother were to take distributions in cash, she would receive very little income from this fund unless she sold units occasionally. That’s because the series A units she owns have a relatively high management expense ratio (MER) of 1.73 per cent, which eats up much of the dividend income generated by stocks in the fund.
Based on distributions over the past 12 months, the Scotia Canadian Dividend Fund yields a puny 0.7 per cent. I don’t know what the adviser’s motivation is for recommending she sell the fund, or what he or she proposes to replace it with, but you should discuss options with the adviser that will provide the income your mother is seeking and – this can be a challenge with an adviser – at a reasonable cost. One reason the fund’s MER is so high, and may be high for other products the adviser recommends, is that it includes a trailing commission paid by the fund company to the adviser’s firm.
The good news for your mother is that, for self-directed accounts, there are more opportunities to keep costs low and generate a higher level of income. I own all three of the companies you mentioned (both personally and in my model Yield Hog Dividend Growth Portfolio, tgam.ca/dividendportfolio). While no investment is a sure thing, these companies are on the lower-risk end of the spectrum and have track records of increasing their cash flow and dividends. Their share prices have also held up exceptionally well during the recent market turmoil. Year-to-date through May 14, BEP.UN posted a total return of 11.6 per cent, AQN returned 2.6 per cent and FTS slipped 2.7 per cent. (All returns cited here include dividends.)
If your mother – and other family members who are presumably helping her – are not comfortable monitoring a portfolio of individual companies, low-cost ETFs are a good option because they provide added diversification with a single purchase. You do not need to sell ETF units to generate cash. Unless your mother asks to enroll her ETFs in a dividend reinvestment plan with her discount broker, she will receive the dividends in cash just as she would from stocks.
There are hundreds of ETFs to choose from. Given your interest in low-risk utilities, you may wish to consider the iShares S&P/TSX Capped Utilities Index ETF (XUT). This ETF – which holds 10 utility, renewable power and infrastructure stocks including BEP.UN, AQN and FTS – has been far less volatile than the market. Its year-to-date total return of negative 4.3 per cent was less than one-third of the S&P/TSX Composite Total Return Index’s loss over the same period. The MER of 0.62 per cent is relatively high for an ETF, but XUT still offers an attractive dividend yield of about 3.7 per cent.
If you want to move even further down the risk scale, consider bond ETFs. The iShares Core Canadian Universe Bond Index ETF (XBB), for example, posted a year-to-date total return of about 5 per cent, thanks largely to falling interest rates that have given bond prices a boost. XBB’s trailing 12-month yield is a modest 2.7 per cent. The yield-to-maturity (YTM) of the bonds in the portfolio is even lower, however, at 1.5 per cent. (The YTM takes into account that bonds now trading at a premium to their par value will gradually fall back to par as their maturity dates approach.) Another low-risk option is guaranteed investment certificates, which currently yield anywhere from about 1.5 per cent for a one-year term to more than 2 per cent for a five-year GIC. But locking in for a long period is not advisable given your mother’s age and desire for income.
In closing, there’s no reason you can’t choose a mix of the above options. Keeping costs down, diversifying and choosing investments that generate reliable and growing income is a recipe for investing success, whether you’re a new investor or a veteran like your mom. Especially at times like these, it pays to err on the side of safety.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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