The best time to buy an annuity is always last year.
Annuity payouts are tied to interest rates, which have mostly fallen in recent decades. It’s an omnipresent hazard for people considering annuities to provide some of their retirement income – they can almost always look back and say they would have been better off buying a year ago.
But annuities have actually held up pretty well in this low-rate world we live in, at least when you compare them with guaranteed investment certificates.
Ivon Hughes, an annuity dealer with the Montreal-based Hughes Trustco Group, recently sent me a table of annuity quotes for January 2021, along with historical quotes going back to 2011. A 65-year-old woman looking for a $100,000 registered annuity would have been able to lock in payments as high as $553.87 in early 2011, according to the list of quotes from 10 insurance companies. Flash ahead to January 2021 and the best comparable quote is 21 per cent less at $436.73.
Now for a comparison with guaranteed investment certificates, courtesy of the historical interest charts provided by the online bank Tangerine. They show that a five-year GIC was available in January 2011 for 3 per cent, which compares with Tangerine’s mid-January 2021 rate of 1.1 per cent for five years.
Five-year GIC returns have been slashed by more than half, while annuity payouts have declined by roughly one-fifth. Annuities look even better when you look at what’s happened with bond yields. The Bank of Canada website shows five-year Government of Canada bonds had a yield around 2.6 per cent in mid-January 2011, compared with about 0.4 per cent now.
Thanks in part to competition between GIC issuers to attract money, rates on these safe investments have not fallen nearly as much as government bond yields. Annuities have held up better, a reflection of the fact that their returns are based on factors beyond rates. Part of annuity returns come from mortality credits, a term that refers to the component of annuity payments that come from people who bought annuities and died before they used up what they paid in.
As usual, one year ago was a better time to buy annuities than right now. The Hughes Trustco quotes show a woman aged 65 could have received as much as $457.87 in early 2020, about $21 more per month than is currently available.
But let’s give annuities their due – payouts have held up surprisingly well despite falling interest rates.
Click here for annuity and GIC rates.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: I am a lifelong dividend investor, but 2020 was the third year in a row I have badly underperformed the Canadian and U.S. indexes. Now, I am questioning my strategy. Specifically, three stocks – Inter Pipeline Ltd. (IPL), Wells Fargo & Co. (WFC) and Altria Group Inc. (MO) – have left me thinking I should be simply buying index ETFs rather than trying to hold a basket of dividend payers. How do you know when to throw in the towel?
Answer: If it makes you feel any better, my model Yield Hog Dividend Growth Portfolio also had a rough year. It delivered a total return of negative 0.5 per cent in 2020, trailing the S&P/TSX Composite Index’s total return of 5.6 per cent. The good news is that, even after a lousy 2020, the model portfolio’s total return of 25.6 per cent since inception on Oct. 1, 2017, still leads the S&P/TSX’s total return of 23.5 per cent over the same period. (Total return figures include dividends.)
But let’s be honest: Those returns pale next to the scorching performance of the S&P 500. Even amid a global pandemic, the S&P 500 posted a total return of 18.4 per cent in 2020. And the S&P 500 has soared 58.7 per cent since my model portfolio was launched in 2017.
So is it time to throw in the towel on dividend investing? I don’t think so. Unfortunately, you stepped on a few land mines in 2020: Inter Pipeline and Wells Fargo both cut their dividends, and Altria Group’s share price tanked even though the company raised its payout. But plenty of U.S. and Canadian dividend growth stocks put up returns well into the double digits. Examples include Microsoft Corp. (MSFT), Apple Inc. (AAPL), Brookfield Infrastructure Corp. (BIPC), Brookfield Renewable Corp. (BEPC) and Innergex Renewable Energy Inc. (INE). (Full disclosure: I own BIPC, BEPC and INE personally.)
Rather than give up on dividend investing, consider adopting a hybrid strategy. You could, for example, hold a core group of dividend stocks including Canadian banks, utilities, power producers and telecoms. These stocks are on the conservative end of the risk spectrum, pay above-average yields and raise their dividends regularly, providing you with a growing income stream.
To add some diversification, consider investing in one or more index ETFs. Information technology stocks have been a huge driver of the S&P 500′s performance, but many of these stocks pay no dividends, which is one reason dividend strategies have lagged in recent years. By investing in an ETF that tracks the S&P 500 – which has 28-per-cent weighting in tech stocks – you’ll get exposure to this important sector, plus hundreds of other companies.
In my personal portfolio, I own a mix of individual dividend growth stocks and Canadian and U.S. index ETFs, and I’ve been pleased with the results. Of course, if you don’t want to own individual stocks, there’s no reason you can’t go with an all-ETF portfolio.
What’s up in the days ahead
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Compiled by Globe Investor Staff