This year’s plunge in interest rates has exposed a quiet flaw in managing your fixed income investments through an online brokerage.
If you want guaranteed investment certificates, prepare to get hosed. The GIC issuers that online brokers deal with offer rates that fall well short of the best available.
One major bank-owned online broker had a menu of one-year GICs this week with yields ranging from 0.35 per cent at the low end to 0.72 per cent at the high end. Meantime, the rate sheet on the Canadian High Interest Savings Accounts website showed LBC Digital at 2.1 per cent, AcceleRate Financial at 2 per cent and several others at 1.8 to 1.9 per cent. In other words, you could easily get double the rate available through the online brokerage or better.
One solution is to hold your GIC investments directly with issuers like LBC or AcceleRate. But what if you insist on the convenience and efficiency of having your portfolio in one spot - your online brokerage account? In that case, here are three GIC alternatives:
Government bonds: Lower yields than GICs because money has flowed into these bonds in recent months in search of a degree of security against financial market uncertainty (bond prices and yields move in opposite directions). The price of bonds issued by the federal government and some provinces have risen to the point where one-year yields for retail investors are negative. That means the cost of the bond is higher than the amount you’ll receive at maturity plus interest payments.
Corporate bonds: They were hammered early in the pandemic and have recovered somewhat, but yields are still generous compared to GICs and government bonds. Higher default risk than both, but you can still get a decent yield and an investment grade credit rating of BBB or higher.
Savings account ETFs: Yields after fees are in the 0.6 to 0.7 per cent range, which makes them comparable to GICs available at online brokers. Expect to pay a trading commission to buy and sell them at most brokers. These ETFs hold deposits at multiple big banks, but their structure doesn’t allow for coverage through Canada Deposit Insurance Corp.
-- Rob Carrick
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Ask Globe Investor
Question: I own units of H&R Real Estate Investment Trust (HR.UN), which fell more than 60 per cent in March and have barely recovered since. Why has H&R fared so poorly compared with other big REITs?
Answer: Even before the coronavirus pandemic, H&R’s payout ratio was elevated. In 2019, the payout ratio soared to 105 per cent of adjusted funds from operations, according to a recent note from Neil Downey, an analyst at RBC Dominion Securities.
When the pandemic hit, H&R’s enclosed malls – which account for about one-fifth of its total rent – were hit especially hard. In April, H&R collected just 40 per cent of rent from its enclosed mall tenants, falling to 30 per cent in May. H&R’s residential and industrial properties also experienced some softness, although not as severe.
Something had to give. When H&R announced quarterly results in May, it slashed its distribution by 50 per cent. H&R said the move would help it absorb rental income disruptions and deal with tenant vacancies caused by the pandemic.
Well before the coronavirus emerged, however, H&R was already in the midst of streamlining its property portfolio. This included selling about $2-billion of assets since 2018, reducing debt and reinvesting capital into higher-growth residential and industrial properties and developments in Canada and the United States.
In his note to clients, Mr. Downey said H&R’s hefty distribution cut “may pave the way to something more strategic over time.”
The distribution reduction, which will save H&R more than $200-million annually, “creates significant earnings retention, which we believe will be useful to support the business, and … may be the precursor to one or more strategic transactions,” Mr. Downey said.
These could include mergers and acquisitions, asset sales or splitting the REIT into pieces, he said. By slashing its distribution now – rather than being forced to make a cut if a future transaction puts pressure on its payout ratio – H&R could have an easier time selling a transaction to unitholders, he said.
“What we do feel that we know is that H&R has a large asset base, and … we believe the asset base is excessively diversified.”
Financial markets hate uncertainty, and right now there is a lot of uncertainty swirling around H&R. That, combined with the hefty distribution cut, is likely putting pressure on the unit price.
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It’s understandable that investors have been running away from retail REITs amid all the store closures and unpaid rents related to COVID-19. But David Berman is smelling an investment opportunity. He’ll explain this weekend.
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Compiled by Globe Investor Staff