As low interest rates from the Bank of Canada, reduce the gain on GICs, one equity strategist says investors should look to dividend stocks to grow their portfolios as they have high yields.
Ian de Verteuil, managing director and Head of Portfolio Strategy at CIBC World Markets says the S&P/TSX Composite Index is broadly diversified with stocks that have strikingly high dividend yields right now.
“Banks are about 20 per cent of the index, but really, it’s a relatively broadly diversified index that you can clip a three per cent dividend yield on and let’s keep in mind, in basic investment accounts, so not tax preferred accounts like RSPs, RRIFs or TFSA, there’s a significant tax advantage on dividends over stocks,” de Verteuil told BNN Bloomberg Tuesday.”
“A three per cent dividend yield is almost like a five per cent equivalent if it was an interest income product, for most taxpayers across the country.”
The central bank held its policy rate at 2.75 per cent for the second consecutive time in June citing continuing trade tensons with the United States. It says outcomes of these negotiations are highly uncertain, tariff rates are well above their levels at the beginning of the year, and new trade actions are still being threatened. Uncertainty remains high.
A low policy rate affects interest rates as savers will earn less interest on deposits in interest-bearing accounts and receive lower rates offered on GICs at renewal, according to Edward Jones. Effectively, the big five Canadian banks, RBC, TD, BMO, Scotiabank and CIBC, are offering GICs around 2.55 per cent to 3.20 per cent.
De Verteuil says he was a GIC refugee, a term coined for investors who, during periods of low interest rates, sought the perceived safety of GICs. However, he says investors are generally relatively risk averse particularly as GIC rates remain low.
“The bulk of these investors are quite conservative investors,” said de Verteuil. “These are individuals like you and I that just swung a bunch of money in when rates were that high, but I think a lot of investors generally relatively risk averse, so a five per cent risk free rate was particularly attractive.”
He said he favours a diversified portfolio of high yield companies, but with business models that have been resilient through pandemics and economic slowdowns.
“On a number of these companies, you can get six or seven per cent dividend yields currently, which – on a tax preferred basis, is almost equivalent to an eight or nine per cent interest income yield,” said de Verteuil.
“You are taking, let’s make sure we’re clear… you are taking additional yield because there is price volatility, but at the end of the day, if you look at most of these stocks over time, over any longer-term time period, one year or two years, it has actually gone up. Not only have you clipped your coupon, but you’ve actually got the appreciation in the stock as well.”