The Quest for Income as rates fall | General financial discussion | Discussion forum

ExtraSauce said
October 2024
GIC/term rates tanking, stock market inflated and overbought so I won't be stepping into equities in a big way until we get a decent pullback.
 

Sounds like you plan to invest but you are also trying to time the market. It's a bad idea. We’ve seen similar sentiments on this forum in January:

“ If you ask me, I am not putting new money into the stock market at current level. It's whatever one's investment style and risk taking capability that dictates when and how much to invest. "Should not time the market" is a very useless 'useful saying', that seem to make a lot of sense, when it really isn't.”

Well, a typical boring balanced portfolio is up 15 to 20% since then. A “decent pullback” will certainly come but it may never reach the levels of early 2024. For all we know, we could be in the same place in 6 months time, talking about October.

The problem with waiting is that you could be waiting for a very long time, all the while missing on opportunity and time in the market. And over the long term time in the market is all that matters.

And interest on fixed income isn’t bad right now. It's above inflation which is a nice change.

I was responding to the specific title of this thread, i.e. the quest for income as rates fall. Dividend equities will/should benefit from continuing drops in rates in fixed income (GICs, bonds, HISAs) because just as the title of this thread says, investors will migrate toward dividend paying equities to replace lost/lower interest income. That will/should provide a tailwind (support) for dividend paying equities regardless of the direction of the overall equities market. It is a virtual certainty that XIU will be paying more in distributions/dividends 5 years from now (and even more 10 years from now) than it currently does.

FWIW, my mother still had a portion of her portfolio in dividend paying equities (a single Canadian dividend stock mutual fund) at the age of 96 when she passed away in 2015. I do not remember the exact numbers but it was in the order of 30 percent of her portfolio at age 80 and 15% of her portfolio at age 95 (general rule of thumb of 110-age for percentage in equities). It is never too late to diversify one's sources of annual income and it is important to remain invested over the long run... i.e. time in the market, rather than timing the market. $100k in XIU* today delivers ~$2.8k in tax advantaged dividend income (in a non-reg account) .

I am not trying to persuade investors to do what they are uncomfortable with but continued drops in BoC interest rates to perhaps 2.5-3% before they are done is going to hurt current interest income folks are receiving by as much as another 30-40% in just a few years.

* XIU is simply a proxy for dividend yielding ETFs proving a balance of income and capital appreciation. If one really wants to emphasize income over capital appreciation, there are dividend heavy ETFs like XDIV yielding 4.4% today (~$4.4k on a $100k investment). I am not recommending a specific dividend ETF.

For completeness. BMO95142 is more than competitive with CIB238 with no $100k minimum threshold required. Its effective yield is 4.38% as of Oct 15th. Its yield also continues to decline as underlying holdings mature and are replaced with lower yield offerings (as the BoC interest rate continues to decline). I suspect most brokerages allow their account holders to buy Class F MMFs from most providers, which is not necessarily the case with ISA deposit products.

That said, all investors face the same dilemma with interest bearing products with the possible exception of bond mutual funds and/or ETFs. Like many though, I am not fond of bond ETFs which have unpredictable returns depending on the variability of the bond market yield curve. Most recently, short term bond yields have been coming down (bond prices going up) while medium and long term bond yields have been going up (bond prices coming down). Life has enough uncertainty for me that I want to have nothing to do with bonds.

qzjxk said
For income I'm holding BK.PR.A, FTN.PR.A, DFN.PR.A and some REITs.  

Preferred shares are even more unpredictable and a nightmare for experienced investors, never mind novices. They need to be studied for some time before dipping toes in those waters. Been there and done that.

ExtraSauce said

I've never bought a bond or bond fund. Only thing I've 'heard' is in falling interest rate market, stay short term bonds, and that is about enough info to just get me into trouble. I'm best not buying things I know little about.

It's actually the opposite: When interest rates are falling, stay in long term bonds. That's because bonds recently issued, with the higher interest payments, will trade above their face value.

For example, Government of Canada 8% bonds maturing June 1, 2027 (135087VW17) are now being offered at 113.086% of face value at Scotia iTRADE for a yield to maturity of 2.789%. They were issued in 1996 when interest rates were higher.

When interest rates are falling, stay in long term bonds.

It's more complicated than this. In general bond prices go up when interest rates fall. But when we say “interest rates” in this context, its a reference to Bank of Canada policy interest rate. That's an overnight rate. It’s possible for overnight rate to be dropped and for long term, say 10 year yields to go up on the exact same day. Long and short term bond prices would then move in different directions with long bonds losing value even though overnight rate dropped.

Its a judgment call, but with 10-year goc bond yields at 3.3%, they don’t have much room to drop even though short term rates are very likely to drop over the next few month. Inverted curve is normalizing, which makes long duration bonds less attractive. And of course long bonds have more interest rate risk, so they seem like a bad deal compared to short duration bonds right now.

The OP isn’t interested in bonds, so this discussion is off topic.