The big development in conservative investing right now is the reluctance GIC issuers are showing to jack up rates on longer terms.
Five per cent yields on one-and two-year guaranteed investment certificates were available this week from both alternative banks and online brokers. But once you get into terms of three, four and five years, rates peak at levels in the high 4-per-cent range. This is important because five-year Government of Canada bond yields, which influence five-year GIC rates, have jumped in the past couple of weeks.
GIC issuers clearly don’t want to increase five-year GIC rates. The rationale seems to be that they don’t believe bond yields will stay that high for long. Why commit to paying 5 per cent for five years when you don’t have to?
It’s a different story in the bond market, where 5-per-cent yields can be easily locked down right now with both individual corporate bonds and exchange-traded funds. The iShares Core Canadian Corporate Bond Index ETF (XCB-T) had an after-fee weighted average yield to maturity of 5.1 per cent in early June, which is the best guide to the yield you should expect going forward.
Online brokerage bond inventories these days include a fair number of investment-grade corporate bonds that offer yields of 5 per cent or slightly more and mature in one through 20-plus years. Investment grade means a rating of BBB or higher, which in turn signifies a reasonable level of financial stability or better. Bonds rated below BBB are categorized as high-yield bonds, aka junk bonds.
Bonds issued by the likes of Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank were available in one broker’s online inventory late last week with yields between 5.2 and 5.4 per cent and maturities of eight to nine years. Comparable bonds from Bell Canada, Pembina Pipelines, Telus Corp. and Metro Inc. were also available.
Don’t touch long-term bonds like these if you can’t live with price fluctuations. It’s a done deal that at some point before these bonds mature, there will be economic events that drive their prices lower. Conversely, you can expect these bonds to rise in price if inflation settles down and interest rates decline.
Price shouldn’t matter much to owners of these bonds, though. You own them to benefit from a low-risk yield of 5 per cent on your upfront investment, a return that some people in the financial world think is too good to last.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: I’m a bit confused on what counts as income for guaranteed income supplement (GIS) calculations. Money Sense has an article that reads: “CPP, interest, and RRSP withdrawals are all counted dollar for dollar, so these items will cost you $0.50 per $1 received.”
How can this be? It’s impossible to be dollar for dollar and also $0.50 on the dollar. Which is correct?
Dividends will cost you $1.40 per dollar so should we avoid dividends?
Answer: Bureaucracy can be confusing at times, and this is an example. What it really means is that any income you receive from the sources you named (plus others like RRIFs, EI benefits, etc.) is included at the full amount in calculating your income for purposes of determining GIS eligibility. So, $1,000 worth of RRSP withdrawals adds $1,000 to your total income – dollar for dollar.
As for dividends, you have to use the grossed-up amount of any such payments in your calculations, which is where the $1.40 number comes from. That may not seem fair but it’s the law.
I should note that withdrawals from a Tax-Free Saving Account do not count as income for GIS purposes.
For every dollar you receive as income, your GIS eligibility is reduced by $0.50. That means if your total income from all qualified sources is $10,000, your GIS payments would be reduced by $5,000.
The maximum monthly GIS payment for a single person in 2023 is $1,026.96 but remember that will be reduced by $0.50 for every dollar of other income you receive. To qualify, a single person’s income cannot exceed $20,832.
-- Gordon Pape
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