Finances seem to be on a lot of people’s minds these days, if the volume of money questions I’m receiving is any indication. Here are some of the latest.
Owning gold
Q – Lots of folks have been discussing buying and holding gold in their portfolios. We are interested to know your thoughts about buying and holding gold in either our TFSAs or RRIFs. What products: stocks, bonds, ETFs, etc. Thank you in advance for your response. – Dave H.
A – The gold price has bounced around the US$1,500-level recently, depending on the headlines of the day. It shoots up when the news is dominated by talk of increased tariffs, conflicts in the Persian Gulf, Brexit, and recession. But last week, with the announcement of a phase one trade deal between the U.S. and China plus some positive economic data, the price retreated. In short, what we’re seeing right now is a volatile short-term market, one that is very much news driven. Over time, however, the trend line for gold is up.
You can own gold, including physical gold, in a self-directed RRSP, RRIF, or TFSA. However, I prefer more liquid forms of assets, such as stocks or ETFs.
My favourite gold stock, and one I own myself, is Franco-Nevada Corp. (FNV-T, FNV-N).
It’s a gold royalty company, which means it does not bear the costs and risks of exploring for and developing new mines. It simply acts as a type of bank, providing financing in exchange for a share of a mine’s production. I recommended it in my Internet Wealth Builder newsletter in July 2010 at $31.69. It closed on Friday at $122.23, an increase of 285 per cent over that time. So far this year, the shares are up about 28 per cent.
There are many ETFs that specialize in gold, if you prefer a direct play on the metal. The biggest is SPDR Gold Shares, which trades in New York under the symbol GLD. It has net assets of about US$44 billion and is up about 15 per cent year to date. It closed on Friday at US$140.03.
Another option, and a very unique one, is the Canadian Gold Reserves’ Exchange Traded Receipts (ETRs), sponsored by the Royal Canadian Mint. The units trade on the TSX under the symbol MNT.
Each ETR provides evidence of ownership in physical gold bullion held in the custody of the Mint at its facilities in Ottawa. Unlike other gold investment products, the purchaser owns the actual gold rather than a unit or share in an entity that owns the gold. Subject to certain restrictions, ETR holders are entitled to redeem their units for physical gold products in the form of 99.99 per cent pure gold bars or coins, or for cash based on the lesser of the gold price on the redemption date and the market price of the ETRs. The latest price of $21.25 is up about 16 per cent this year.
If you want more cash flow from your gold holdings, look at CI First Asset Gold Giants Covered Call ETF (CGXF-T).
The managers write covered call options on 25 per cent of the shares in each of the 15 gold stocks in the portfolio. The company predicts the strategy should produce an annual yield of 9-11 per cent, most of which will be tax-deferred return of capital. But remember, that’s an estimate. This is a re-purposed ETF (its predecessor had a broader materials focus) so we don’t have a track record to rely on.
There are many other options available but these are good places to start. – G.P.
DRIPs
Q - What do you think of using DRIPs as an investing strategy? I was thinking of using the hybrid DRIP with Questrade. And what do you think of the DRIPs that buy you partial shares? – Dave D.
A – DRIP is short for dividend reinvestment plan. Many companies offer them to allow people to reinvest their dividends in new shares. No commissions are charged and, in some cases, companies offer a small discount from the market price.
DRIPs are an excellent option if you don’t need the cash flow from dividends and if you want to build your position in a company over time.
I’m not a big fan of buying partial shares as it complicates the calculation of adjusted cost base.
I asked Questrade for an explanation of their hybrid DRIP. They replied that these are fairly common among discount brokers and are also known as synthetic DRIPs.
“Essentially the customer is registering their intent to reinvest cash dividends with the brokerage vs. a share purchase plan directly with the underlying issuer as with a traditional DRIP,” Questrade said.
“The hybrid approach is much easier and quicker for the customer to set up, and ‘traditional DRIPs’ are becoming somewhat less common as, for amongst other reasons, the issuer is required to increase the number of shares in circulation each quarter which can have a negative impact on price.
“There are some differences between a hybrid and traditional DRIPs – for example with the hybrid approach only whole shares are purchased, whereas with a traditional DRIP fractional shares can be purchased. We’ve supported the hybrid DRIP for a long time, and we don’t hear from customers asking for us to support a ‘traditional DRIP’.” – G.P.
WPT REIT
Q – I am interested in WPT Industrial REIT that trades on the TSX as WIR.U. The dividend it pays is in American dollars. Would you know if I would receive the dividend in American dollars or would it be converted to Canadian.? Also, would it be subject to withholding tax if it is in my RRSP? – Ida V.
A – The REIT’s payments are in U.S. dollars and would be received in that form in a non-registered account. But any U.S. funds received in an RRSP or RRIF will automatically be converted to Canadian currency. There is no withholding tax on dividends/distributions paid to an RRSP or RRIF. – G.P.
Sentry U.S. fund
Q – You recommended Sentry U.S. Growth & Income on Sept. 29, 2016 in The Income Investor. Could you please review this fund? I have held it since then. The MER is quite high and the income is low. I was thinking of replacing it with Mawer U.S. Equity since the income is not important even though it is in a RRIF. I do need the U.S. equity. Thank you. – Jane S.
A – The Sentry fund has performed well, with an average annual return of 10.45 per cent over the five years to Oct. 4. The cash flow is 60 cents a year (current yield 2.6 per cent).
Although the Sentry fund has been a good performer, the Mawer U.S. Equity Fund has been better, with a five-year average annual return of 16.15 per cent to Oct. 4. That puts it in the top 10 per cent of all the funds in its category. Its cash flow is negligible (one annual payment, in December). However, you say that doesn’t matter to you, so on that basis it is the better choice. – G.P.
Motive Financial
Q - I was looking to put some cash in a high interest saving account and I found that Motive, a part of Canadian Western Bank, is offering 2.8 per cent on savings. Do you have any thoughts on this institution? – Gord Z.
A – Motive is an on-line banking division of Canadian Western Bank (CWB). It doesn’t have any physical branches; all transactions are processed over the internet. As a division of CWB, deposits up to $100,000 are covered by the Canada Deposit Insurance Corporation.
You are correct that Motive is currently offering 2.8 per cent on its Money Savvy Savings Account. There is no minimum account balance and no monthly fee, but you are limited to two free transactions per month. – G.P.
If you have a money question you’d like answered, send it to me at gpape@rogers.com and write Globe Question in the subject line. I can’t guarantee a personal reply, but I’ll answer as many questions as possible in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape