It’s been a while since I dealt with the questions that have piled up in the inbox, so let’s look at some of them now.
Investing U.S. dollars
Q - I currently hold a large cash position in U.S. dollars. I consider the U.S. equity market over-valued. Returns on USD GICs and money market instruments approach zero. What options exist for investing this cash? Are there opportunities in the U.S. bond market for a conservative investor? – Robert B.
A – You might want to consider the iShares Treasury Bond ETF (GOVT-A). This ETF invests exclusively in U.S. Treasury bonds, with maturities from one to 30 years. Treasuries are considered to be one of the safest places for your money right now and the fund has done well this year with a gain of 8.56 per cent since Jan. 1 (to July 2). Don’t expect that kind of return going forward but you’ll probably do better than leaving the money in a savings account. – G.P.
Q - My view is that the markets are hugely underestimating the dire economic and social consequences of the pandemic. I am de-risking my portfolio. I have a couple of questions.
1. Do you have a view of RioCan? It is well-run and looks undervalued, but the risks are great.
2. Any views on Emerging Markets? I have XEM, which has a lot of China/Taiwan and Korea, but also much more dubious holdings in India and Russia. Best wishes. – Doug G.
A – RioCan (REI.UN-T) was the largest REIT in Canada for many years and the king of the shopping mall operators. It was a recommendation of my Income Investor newsletter for years, but we sold (at a nice profit) when it became apparent on-line shopping was starting to steal market share from brick and mortar retailers.
The trust has been aggressively diversifying its business and the shares traded in a fairly narrow range in recent years, until they fell off a cliff in March. As I write, they are down 42.6 per cent from their 52-week high, which may be an overcorrection.
The trust reported good first-quarter results and said it is in “good financial health with a strong balance sheet, ample liquidity, staggered debt maturities and multiple sources of financing combined with a large unencumbered asset pool”.
The distribution has been maintained at $0.12 a month, which is a positive sign since several other REITs have cut payments. At the time of writing, the yield was over 9 per cent.
That’s a very attractive payout, perhaps too much so. At this level, buying units would not be a derisking tactic. It may be a smart move over the longer term, but when you see a 9 per cent yield it means there are caution lights flashing.
XEM is the trading symbol for the iShares MSCI Emerging Markets Index ETF. It also trades in New York as EEM. As the name suggests the fund holds a portfolio of stocks from Emerging Markets including the countries you mention plus Brazil, South Africa, Thailand, etc.
As of the time of writing, it is down 10 per cent year to date. The five-year average annual total return to the end of May was 1.93 per cent - not impressive when related to the risk factor.
I suggest you need to do some rethinking if you really want to reduce portfolio risk. – G.P.
Confused by dividend
Q – I was looking at the Evolve Global Healthcare Enhanced Yield Fund Hedged Units ETF (LIFE-T). It says its distributions are about 7 per cent but it says its dividend is about 2 per cent. I am confused as to what this means. Can you help? – Gord Z.
A – This ETF invests in 20 leading healthcare companies from around the world, with just over half the portfolio in the U.S. Top holdings include AstraZeneca, Danahar Corp., Chuga Pharmaceutical, AbbVie Inc., and Roche Holding. It is hedged to the Canadian dollar and the managers use a covered call strategy to generate additional cash flow.
It has done well since its launch in October 2017 with a two-year average annual compound rate of return of 14.9 per cent to July 2.
The fund is currently making distributions of 12.5 cents per month ($1.50 per year). If that rate were maintained over the next 12 months (no guarantee), the yield would be 7 per cent, based on the recent price.
I could find nothing on the website or the fact sheet of the 2-per-cent dividend you mention. It may refer to the average dividend on the stocks in the portfolio, which has nothing to do with the yield on the ETF. – G.P.
Q: When I have cash in my RRSP that I want to hold how do I get it into the high interest savings accounts you recommend without having to take it out of my RRSP? – Art L.
A: Ask the administrator of your RRSP. The company should have access to at least one and probably more high-interest accounts that can be used. Ask for the one with the best rate. Unfortunately, you’ll probably find its less than the comparable rate on a non-registered account. And be warned – “high interest” doesn’t mean a lot these days. - G.P.
Who to believe?
Q – I have access to different analysis on stocks, including Morningstar, Argus, Thomson Reuters, and TD. They all suggest target prices on stocks, most of the time higher than at present, and they very rarely suggest selling. These days, it is very easy to find reports suggesting returns of over 50 per cent for the next 12 months.
What is the value of these reports? They all seem to be based on a coming return to a normal economy and they all seem to forget about the risk of the current context and recession.
These reports are prepared by competent and honest people. But I do not know to what extent they can be useful for investors. – Marcel B.
A – There are many divergent views of stocks these days, because of the tremendous uncertainty we face. These reports can provide useful insights but read them carefully to see if they make sense in the context of your own knowledge and objectives. Forget about price targets – I think they are meaningless right now. Rather, look for references to strong balance sheets, dividend sustainability, and growth potential in the current environment. That will help you to decide which reports have credibility in relation to your personal requirements. – G.P.
Q – What are the TFSA rules when young Canadians are out of country in the U.K.? - Cynthia M.
A – Non-residents of Canada may not open a TFSA, but they can keep one that’s already open. No new contributions are allowed while they are abroad and contribution room does not accumulate. They can make withdrawals, but they can’t replace those funds while still abroad. Also, there may be tax liabilities for withdrawals, depending on the country in which they reside. – G.P.
If you have a financial question you’d like me to answer, send it to firstname.lastname@example.org. Write “Globe Question” in the subject line. Sorry, I cannot guarantee a personal response but I’ll 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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