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The Bank of Canada’s benchmark lending rate is in a holding pattern now, but savings accounts are already starting to offer lower returns.

The latest news on the super useful website is a laundry list of rate cuts from the alternative banks that have for a year now offered the best returns for savers. The cuts are small - just 0.05 to 0.15 of a percentage point. But they’re also a sign of what’s coming in rates for savers and conservative investors.

The king of savings in mid-May was the Motive Financial Savvy Savings Account, with a rate of 4.1 per cent. You can do better than that with a variety of savings vehicles designed to be held in your investment account.

High interest savings accounts packaged like mutual funds had rates of 4.05 to 4.6 per cent in mid-May, and many offer deposit insurance through Canada Deposit Insurance Corp. HISA exchange-traded funds do not offer deposit insurance, but the yields are in the 4.8 per cent range these days.

To access HISAs in a mutual fund or ETF format, it’s easiest if you have a digital brokerage account. Transfer cash from your chequing account to your investment account and then invest in a fund that works for you. When you need the cash, place a sell order and stand by for a couple of days to see the cash in your investment account. Transfer that cash to your chequing account and away you go.

A quick way to undo the benefit of a high rate on a HISA investment product is to incur commissions to buy and sell. HISAs packaged as mutual funds generally cost nothing to buy or sell, but HISA ETFs may cost up to $9.99 per buy and sell. Some brokers don’t charge to buy ETFs, but regular commissions apply to sell orders. The three brokers with zero commissions, period: Desjardins Online Brokerage, National Bank Direct Brokerage and Wealthsimple Trade.

A trio of brokers - BMO InvestorLine, RBC Direct Investing and TD Direct Investing - do not allow clients to access HISA ETFs. The idea is to force clients to buy in-house HISAs in mutual fund form. Don’t be shocked: The rates paid by these products are typically 4.05 per cent, at the low end of the range for HISAs designed for investment accounts.

A rate of 4.2 per cent was available in mid-May from HISAs offered by Equitable Bank, Home Trust and Manulife Bank, while the CI High Interest Savings Fund offered 4.6 per cent. HISA ETFs were in the 4.8 per cent range in mid-May and can be expected to remain there until the Bank of Canada starts cutting its benchmark rate.

-- Rob Carrick, personal finance columnist

Also see: Rob Carrick’s risk analysis for investors who hold cash and hate surprises

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Stocks to ponder

Algonquin Power and Utilities Corp. (AQN-T) The company announced last week that it may hive off its renewable energy group through a sale or spinoff, leaving investors contemplating whether the recovering stock is about to get a whole lot better. David Berman has a suggestion on how investors should approach the latest twist in the Algonquin Power saga.

Fortis Inc. (FTS-T) There’s been a turnaround in the performance of utilities after a very poor 2022. The TSX total returns capped utilities index is ahead more than 10 per cent year to date. That means investors have recovered most of the losses of 2022 in less than four and a half months. Gordon Pape explains what’s behind the turnaround and why Fortis is his go-to choice in the sector.

The Rundown

Are we ever going to get to that recession?

A stock market forecast can be a complicated, nuanced thing. Right now, though, any outlook boils down to a simple question: Are we on the verge of a recession or not? If a recession lies ahead, corporate earnings are going to suffer. Stocks are about as tempting as three-day-old doughnuts. On the other hand, if a recession is not in the offing, then broad swaths of the stock market could be rather appetizing. In Ian McGugan’s view – and, more importantly, in the view of most economic models – a recession is still the most likely possibility. The problem, as he explains, is figuring out when it might arrive.

This portfolio offers strategy with momentum

Norman Rothery explains how he devised his momentum strategy for Canadian stocks - and points out some important caveats, including the mistake of holding too few stocks. And, for an update on all of his dividend and value portfolios worth watching, click here.

Amid banking woes, faltering U.S. small-caps offer ominous economic sign

A U.S. stocks rally is leaving behind smaller companies, a sign investors may be bracing for economic turmoil ahead. As Lewis Krauskopf of Reuters reports, the small-cap Russell 2000 is down about 1 per cent this year, compared to a rally that has boosted the S&P 500, an index representing the largest U.S. companies, 7 per cent year-to-date.

Others (for subscribers)

Monday’s Insider Report: CEO invests over $500,000 in this energy stock after a dividend hike

Monday’s analyst upgrades and downgrades

Ask Globe Investor

Question: I know John Heinzl is a fan of companies that raise their dividends. Which is better: a stock with a high dividend that grows at a modest pace, or a stock with a modest dividend that grows at a high pace?

Answer: It depends. Let’s start with a little investing theory.

In finance, there’s something called the dividend discount model. Also known as the Gordon growth model, it’s an equation for calculating a stock’s current worth based on all of its expected future dividend payments, discounted back to their present value.

The Gordon growth model – named after the late economist, Myron J. Gordon, who spent many years at the University of Toronto – is relevant here because, if you rearrange the equation, it provides a way to estimate the return of a dividend-paying stock. Specifically, the equation holds that a stock’s annual return should equal the current dividend yield plus the dividend growth rate. For example, a stock that yields 6 per cent, and whose dividend grows at 4 per cent annually, should theoretically return 10 per cent annually, assuming all dividends are reinvested in additional shares.

Similarly, a stock yielding 3 per cent, and whose dividend grows at 7 per cent, should also produce an annualized total return of 10 per cent – at least in theory. Again, this assumes all dividends are reinvested. So, according to the formula, it’s not the yield or dividend growth rate in isolation that matters, but the combination of the two.

As a dividend growth investor, I aim to get the best of both worlds: an above-average yield, and a high dividend growth rate. Many classic dividend-paying companies – such as banks, utilities and telecoms – tick these boxes. (For specific examples, see my model Yield Hog Dividend Growth Portfolio.)

The Gordon growth model is far from perfect. A key assumption of the model in its most basic form is that the dividend will grow at a constant rate, which never happens in real life. The model also assumes that the share price will rise at the same rate as the dividend, which, again, is not necessarily the case.

Stock prices are influenced by myriad factors, including interest rates, inflation, economic growth, market sentiment and company-specific developments. Dividend growth rates can increase or decrease, and in extreme cases dividends can be reduced or eliminated if a company’s outlook changes for the worse. Over the long run, however, a company that pays a solid yield and raises its dividend steadily stands a good chance of producing attractive returns.

Instead of trying to pick one dividend growth stock over another, my advice is to diversify by holding a mix of high-quality dividend growth companies with yields in the 3- to 6-per-cent range, give or take a percentage point. Stocks with yields higher than that require additional investigation, as their dividends may not be sustainable. For added diversification, I also recommend holding exchange-traded funds that track major Canadian and U.S. stock indexes.

If you ignore market volatility and focus instead on collecting your dividends – and reinvesting them to turbocharge your portfolio’s growth – chances are you will make out well in the long run.

--John Heinzl

What’s up in the days ahead

The Contra Guys have returned from Warren Buffett’s annual meeting in Omaha with some fresh thoughts on whether the time is right to buy shares in Berkshire Hathaway.

Retail giants Walmart and Home Depot to release Q1 results in this week’s Advisor Lookahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff