It’s been a blast comparing guaranteed investment certificates and dividend stocks in the past year or two. Finally, it’s a fair fight.
Before interest rates kicked higher last year, GICs were an investing niche of interest only to people willing to utterly sacrifice returns in exchange for safety. With rates where they are today, GICs are very competitive with stocks and bonds. GICs look all the better in light of the fact that there is virtually no risk of losing money if you stay within deposit insurance limits.
An obvious alternative to GICs right now is the blue chip dividend stock, many of which have been decimated recently by money flows into bonds, T-bills and, yes, GICs. You can get yields as high as 6 to nearly 8 per cent from these stocks, which is better than the 5 to nearly 6 per cent returns available for GIC with terms of one through five years.
Dividend stocks can give you higher yields, but vulnerability to jarring price drops. That’s why dividend yields are so high right now – prices and yield move in the opposite direction. GICs pay less, but they’re impervious to upsets caused by events in financial markets.
The clearest victory for dividend stocks over GICs is in tax owing in non-registered accounts. Dividends paid by publicly traded Canadian corporations benefit from the dividend tax credit, which means you pay less tax on $1 of dividends than on $1 of interest from a GIC or bond.
E&Y’s online tax calculator shows that seniors with taxable income of $53,000 would have a marginal tax of zero on dividends paid from a Canadian corporation in five jurisdictions - British Columbia, Ontario, New Brunswick, the Northwest Territories and the Yukon.
Swap a GIC in for dividend stocks and the usual marginal tax rate would apply on interest income - a range of 22.7 per cent in B.C. to 31.5 per cent in Quebec.
Someone with an income of $150,000 would have a marginal tax rate of 18.9 to 32 per cent on eligible dividends, and 38 to 47.5 per cent on interest income.
GICs would ideally go into tax-free savings accounts, but contribution room is limited. This means a lot of GIC investors must weigh the pros and cons of the safety and comparatively strong returns from GICs right now, along with the full tax hit. As ever, investing is making compromises.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Birkenstock Holding PLC (BIRK-N) The German footwear company grabbed a lot of attention in the runup to its listing on the New York Stock Exchange after an initial public offering that concluded earlier this month. But as David Berman reports, investors seem to be resisting its charms.
The Rundown
This new bond ETF promises a 10% yield. Be wary!
Here’s something new. Hamilton Capital Partners has just launched a new ETF that focuses on writing covered call options on fixed income securities. There are lots of funds that write covered calls on stocks to generate above-average income. But bonds? No one in Canada has tried that before. Gordon Pape gives us his thoughts on this new product.
The Halloween Indicator is anything but spooky
This month’s spooky festival also plays a role in the market because it lends its name to the Halloween Indicator, which is the flip side of the old adage to sell in May and go away. That is, one should buy stocks when the witches are out. Norman Rothery takes a look at the recent returns of a Canadian Halloween portfolio that invests in stocks from November through April of each year and in bonds from May through October. And for a fresh update on his portfolios for dividend and value investors, click here.
Tired of obsessing about interest rates? Too bad, because we can’t afford to stop
The interest-rate conversation is sucking up a lot of oxygen in the room. For many investors, a certain amount of interest-rate fatigue has set in. Well, that’s too bad, writes Tim Shufelt - because this is an era of financial markets with interest rates at its core.
Others (for subscribers)
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UBS pushes out S&P 500 mid-2024 target forecast to year-end
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Ask Globe Investor
Question: I am trying to figure out how I can put $6,000 into my TFSA. Is it a worthwhile idea to transfer some of my stocks from another investing account into my TFSA instead of using cash? – Kathie S.
Answer: Stock transfers to a Tax-Free Savings Account are permitted by law. If your account allows you to hold stocks (some don’t) it won’t be a problem. But there are two factors to consider before you decide.
First, you should never transfer losing stocks into a TFSA, or any registered plan. The Canada Revenue Agency will not allow you to claim any capital losses in that situation. You should sell the losers into the market, thereby legitimizing any capital losses. Then contribute the cash.
If you have winning stocks, transferring them to a TFSA is deemed as a sale and will trigger a capital gain. You must decide if you want to incur that tax liability now. The shares will be valued at their current price when they go into the TFSA and future capital gains will be tax sheltered.
-- Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line.)
What’s up in the days ahead
Is India really the right country for Canadian investors to bet on right now? Gordon Pape will provide some thoughts.
Video: How inflation data could affect BoC’s decision on interest rates
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Compiled by Globe Investor Staff
Rob Carrick