Your money questions continue to flow in, so let’s look at the latest batch.
Brookfield Renewables
Q – I have seen many recommendations for Brookfield Renewable Partners (BEP.UN-T, BEP-N), and yet the P/E is 277 (usually non-existent) and dividends are about 3 per cent.
How can this company reliably pay a dividend when the earnings are non-existent? I have seen justifications based on cash flow; but how can this make any sense if the company is not earning? – Ronald A.
A – As with REITs, funds from operations (FFO) is a more precise way of assessing the financial health of Brookfield Renewables. Investopedia.com says FFO is calculated by adding depreciation and amortization to earnings and then subtracting any gains on sales. It suggests the FFO-per-share ratio should be used instead of earnings per share when evaluating REITs and other similar investment trusts.
In the first quarter, BEP reported FFO of US$217-million (70 US cents per unit). The quarterly distribution was 54.3 US cents. The yield is 3.9 per cent.
Brookfield Renewables CEO Sachin Shah said at the time: “In spite of the significant market volatility and a potentially deep recession, our operations remain resilient, our earnings are expected to be stable, and our financial position, which allows us to pursue growth, is in excellent shape.” – G.P.
Too late for gold?
Q - Being a bit of a nervous nelly and somewhat pessimistic about the next 6 to 12 months (or longer?) I’m thinking of abandoning my 60/40 portfolio by reducing exposure to stocks and adding exposure to more fixed income but I’m wondering: you stated in June that some gold would be prudent, and you made some suggestions in terms of companies or a couple of ETFs and I think all of them have since gone up in price. Am I too late to add gold? Appreciate your work and thanks. - James R., Victoria, BC
A – No one can predict with certainty what the price of gold will do from day to day, but all the conditions are in place for a long-term upward trend. Central banks are printing money at an unprecedented rate while governments are running up sky-high deficits. All this, of course, is to keep the economy from a total collapse but it appears likely that the end result will be a weakening of paper currency and a move into more hard assets, including gold.
The price of gold is now approaching US$1,950 range and Goldman Sachs is projecting it will top US$2,000 in the medium term. So, the answer is no, I do not think it is too late to add a gold position to your portfolio. – G.P.
Account for granddaughter
Q – I am starting a trading account for my granddaughter as a graduation gift. Could you recommend an ETF as a starter purchase? – Marta K.
A – Your granddaughter has a lengthy time horizon, so that would suggest an equity fund in normal circumstances. However, these times are anything but normal. The future is uncertain, and stocks look expensive at current levels.
Therefore, I would opt for a more conservative approach. This will presumably be your granddaughter’s first experience with investing, and we don’t want it to start with a big loss because of a market meltdown.
I suggest you look at the iShares Core Balanced ETF Portfolio (XBAL-T). It invests in a portfolio of eight other iShares ETFs that offer global equity coverage and exposure to the Canadian and U.S. bond markets. The overall asset mix is about 60-per-cent equities, 40-per-cent fixed income, making this a classic balanced fund.
Distributions are paid quarterly. The management expense ratio is a reasonable 0.2 per cent.
This is not a get-rich-quick fund by any stretch of the imagination. It is a relatively low risk way to dip a toe into the investing pond. The average annual return over the past five years (to June 30) is 5.1 per cent. – G.P.
Concerned about mortgages
Q - I have owned a short-term bond and mortgage fund for a few years and it seems to do better than some short-term bond ETFs, such as XSB. However, I am concerned about the mortgage component of the fund. Is it not vulnerable to the weaker economic conditions that many people see ahead of us? Thank you! – Aïda D.
A - Yes, we could see some mortgage vulnerability, but it is not showing up yet and the banks are doing everything possible to minimize defaults.
You should talk to the company that runs the fund. Find out what percentage of the assets are in mortgages, and how much of that is in loans insured by CMHC or Genworth. Also ask what actions the managers are taking to minimize risk. As a unit holder, you have a right to those answers. - G.P.
Follow the money
Q - The bullish narrative of market pundits is that there is a massive amount of money sitting in money market accounts that eventually has to make its way into the equity markets. It seems like a large majority of mutual fund portfolio managers and institutional money managers are fully invested, so what do you think is the source of all this money? I have read that it is as high as 20 per cent. Thanks. – Paul R.
A – Between government support programs and central bank quantitative easing, the economy is being flooded with money. One consequence of this is the inflation of asset values. Stocks are overpriced, and it now looks like the housing market is recovering as well.
Meantime, consumers are spending less and saving more. The net result has been some deleveraging at the household level and a build-up of liquid assets.
This combination could continue to drive stocks higher but if profits don’t keep pace, the bubble will eventually burst. Given the grim outlook for the economy for at least the next year, that’s a possibility. There may be a lot of money sitting on the sidelines, but it’s not going to be committed unless investors have confidence the markets aren’t going to stage a repeat of the March meltdown. – G.P.
Protecting assets
Q – I am 80 years old and like many my age I have sold my home. I now am looking at investing these funds but wish to protect the capital. With interest rates so low I do not know the best way to go. Could you please comment on this subject? - Carolyn T.
A – You’re not alone. Many people are in exactly the same position – you want to protect your assets, but you want to earn more than the low interest rates available on savings accounts and GICs. It’s a challenge.
Step one is to decide on your number one priority. If it is safety above all, you’ll probably have to swallow hard and invest in a laddered portfolio of GICs and a high-interest savings account. You’ll find better rates at smaller institutions.
A middle ground would be to put some of the money in GICs and high-interest savings accounts. Invest the rest in dividend-paying blue-chip stocks that are unlikely to cut payouts. These might include BCE Inc., AT&T Inc., Fortis Inc., Canadian Utilities Ltd., IBM Corp., TC Energy Corp., and some carefully selected preferred shares. The dividends would provide steady cash flow, but you would have to be able to live with variations in the market price of the stocks.
I would not suggest an all-stock blue-chip portfolio. It would offer the best cash flow and capital growth potential over time, but it is too risky given your age and the uncertain times in which we live. – G.P.
If you have a money question for me, send it to gpape@rogers.com and write Globe Question on the subject line. I can’t guarantee a personal answer, but I will deal with as many questions as possible in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape