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Equities as an alternative to low interest GICs
May 6, 2020
6:14 pm
Doug
British Columbia, Canada
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With GIC and HISA rates expected, at least in my long-term forecasts, to remain at or below 3.0% for the next twenty years, notwithstanding occasional new customer or temporary promotional offers, one's real return on their savings, after accounting for income taxes payable and the loss of purchasing power, is expected to be at or below 1% in most cases. At the same time, the equity markets, in select sectors, offer far better long-term compounded annual returns, provided one (a) can live off of the dividend or interest income, as applicable, (b) not need to dip into their principal, and (c) be content with potential volatility in the market value of one's portfolio. Of course, it's still prudent to hold between 20-40% of one's total portfolio in fixed income securities and cash (whether investment grade bonds, GICs, and/or HISAs). Nevertheless, it could be prudent to increase one's allocation to equities at this time, subject to one's risk tolerance, time horizon, and personal financial circumstances, of course.

The following is a brief review of the current trailing twelve month Price-to-Earnings, Price-to-Book, and dividend ratios/yields, as applicable, for Canadian banks or financial services companies, life insurance companies, and asset managers. Users are strongly encouraged to conduct their own investment research and due diligence, but these nonetheless provide a useful starting point as an equity screen.

** All values as of closing prices on May 6, 2020.

Canadian Banks

  • Bank of Montreal
  • P/E: 7.8
  • P/B: 0.95
  • Current Dividend Yield: 6.24%
  • Bank of Nova Scotia
  • P/E: 7.8
  • P/B: 1.01
  • Current Dividend Yield: 6.80%
  • Canadian Imperial Bank of Commerce
  • P/E: 7.3
  • P/B: 1.01
  • Current Dividend Yield: 7.08%
  • Canadian Western Bank
  • P/E: 6.7
  • P/B: 0.70
  • Current Dividend Yield: 5.56%
  • Equitable Group, Inc.
  • P/E: 5.2
  • P/B: 0.77
  • Current Dividend Yield: 2.32%
  • First National Financial Corporation
  • P/E: 10.10
  • P/B: 3.726
  • Current Dividend Yield:
  • *Not a bank, trust or loan company, but is the largest non-bank mortgage lender in Canada with more than $110 billion in mortgages under administration
  • **Book value is higher than the banks because the mortgages it administers are nearly all securitized off its balance sheet; it doesn't "own" them, but just services them.
  • Home Capital Group, Inc.
  • P/E: 7.50
  • P/B: 0.55
  • Current Dividend Yield: No dividend, but generating strong free cash flow, which its redeploying aggressively into technology and marketing spending
  • Laurentian Bank
  • P/E: 8.40
  • P/B: 0.55
  • Current Dividend Yield: 9.02%
  • MCAN Mortgage Corporation
  • P/E: 5.80
  • P/B: 0.86
  • Current Dividend Yield: 11.58%
  • National Bank of Canada
  • P/E: 8.40
  • P/B: 1.48
  • Current Dividend Yield: 5.12%
  • Royal Bank of Canada
  • P/E: 9.40
  • P/B: 1.54
  • Current Dividend Yield: 5.11%
  • Toronto-Dominion Bank
  • P/E: 8.70
  • P/B: 1.24
  • Current Dividend Yield: 5.57%

Canadian Life Insurers, with Asset Management Operations

  • E-L Financial Corporation, Limited
  • P/E: 3.60
  • P/B: 0.45
  • Current Dividend Yield: 0.75%
  • *Owns Empire Life Insurance Company of Canada, as well as large equity stakes in a closed end investment company in United Corporations, Limited, and Algoma Central Corporation
  • Fairfax Financial Holdings, Limited
  • P/E: N/A, due to large loss for the MRQ
  • P/B: 0.61
  • Current Dividend Yield: 3.72%
  • Great-West Lifeco, Inc.
  • P/E: 8.8
  • P/B: 1.02
  • Current Dividend Yield: 7.98%
  • *Roughly 65-70% owned by Power Corporation of Canada
  • iA Financial Group, Inc.
  • P/E: 7.0
  • P/B: 0.86
  • Current Dividend Yield: 4.36%
  • Manulife Financial Corporation
  • P/E: 6.0
  • P/B: 0.72
  • Current Dividend Yield: 6.72%
  • Power Corporation of Canada
  • P/E: 8.4
  • P/B: 1.10
  • Current Dividend Yield: 8.40%
  • *Owns 65-70% of Great-West Lifeco, Inc., and 60-65% of IGM Financial, Inc.
  • Sun Life Financial, Inc.
  • P/E: 10.60
  • P/B: 1.32
  • Current Dividend Yield: 4.60%

Investment and Asset Management Firms

  • CI Financial Corporation
  • P/E: 6.10
  • P/B: 2.01
  • Current Dividend Yield: 5.28%
  • IGM Financial, Inc.
  • P/E: 9.0
  • P/B: 1.47
  • Current Dividend Yield: 8.10%
  • *Owned 60-65% by Power Corporation of Canada. IGM Financial, Inc., also owns a small interest in Great-West Lifeco, Inc., and is one of the largest shareholder in Wealthsimple, Inc.

What do you guys think? Let's discuss. sf-cool

Cheers,
Doug

May 6, 2020
6:31 pm
toto
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That was a lot of work Doug , thank you for the info!
I was surprised at some of the bank dividends, like Laurentian, wow!
I'm all set up on investorline and waiting for another drop, possibly when employment numbers comes out next, and then I'm buying 2 banks, 1 utility, and 1 insurance company.
Market seems to go up on bad news lately so hard to know when to jump in.

May 6, 2020
7:15 pm
Bud
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Trouble is Doug ur too wordy n stocks r overpriced. Many as we've seen have weak balance sheets. Dougs theory might be inflation will inflate their earnings.

May 6, 2020
7:48 pm
Windsurfer
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That's a lot of work, thanks for that.
I'm wondering if banks and other lending institutions are actually high risk investments right now give the tidal wave of debt defaults that are coming due to the pandemic. We all know that personal debt is rampant but even corporate debt is at all time highs. There are huge swaths of the economy that will not recover or will recover very slowly. Think travel, leisure, restaurants. In the meantime, heavily indebted individuals and corporations are going to be unable to service their debts. Mortgages, car loans, credit cards, etc. The banks are going to be swimming in defaults. That can't be good for business. Have I just been reading too many doomsday articles?

May 7, 2020
3:24 am
cruzinalong
Ontario
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toto said
That was a lot of work Doug , thank you for the info!
I was surprised at some of the bank dividends, like Laurentian, wow!
I'm all set up on investorline and waiting for another drop, possibly when employment numbers comes out next, and then I'm buying 2 banks, 1 utility, and 1 insurance company.
Market seems to go up on bad news lately so hard to know when to jump in.  

Yes far to complex. Not a bad way you are doing. 2 banks, 1 utility and 1 insurance company. I have 1 bank and 1 utility. Only suggestion buy 1 bank buy another sector that you do not have. Many sectors to choose from. Too numerous to list here.

May 7, 2020
6:21 am
Alexandre
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Doug said
With GIC and HISA rates expected, at least in my long-term forecasts, to remain at or below 3.0% for the next twenty years
...
At the same time, the equity markets, in select sectors, offer far better long-term compounded annual returns, provided one (a) can live off of the dividend or interest income, as applicable, (b) not need to dip into their principal, and (c) be content with potential volatility in the market value of one's portfolio.
...
What do you guys think? Let's discuss. sf-cool

Cheers,
Doug  

I am looking at the problem of low interest rates for savers differently.

First of all, I don't consider in my financial planning to die rich - I am assuming how much of my savings and assets is left after I am dead would be irrelevant for me.

Secondly, I am at good place right now where I could modestly live off 3% interest, without touching principal. I agree with Doug that these interest rates will not come back any time soon.

So, this is what I am thinking. If I spend 3% of my current savings annually, I can keep spending for 33 years before I run out of money.

I will be honest with myself and will assume I won't live past 93 years of age. Not very many people do.

Which means, if I start taking 3% of my current savings at the age of 60, I'll be fine without investing in stocks and risking losing money due to potential volatility in the financial market. Yes, I know, some people strike rich by investing wisely, but I never won big in lottery or at casino and don't expect to, same with equities.

Well, what about modest inflation eating into real value of those 3% taken from principal annually? I plan to offset it by applying for CPP at the age of 60, followed by whatever else government will be kind to give me after I hit 65.

This is my plan.

PS. I also plan to liquidate all my RRSPs before I am 65, by gradually transferring everything to regular savings. For obvious reasons consistent with my plan.

May 7, 2020
7:55 am
Koogie
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Sorry, couldn't make it past this presumption.....

"With GIC and HISA rates expected, at least in my long-term forecasts, to remain at or below 3.0% for the next twenty years.."

What else does your crystal ball tell you ? Lottery numbers, Super Bowl winners ?

We could go on to discuss the weakness of P/E and yield as accurate predictors of future value but let's not ignore the elephant in the doorway before proceeding....

disclosure: I own/have owned most of the names in the banking/insurance sector at one time.

May 7, 2020
8:53 am
Bill
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Windsurfer, I agree, tend to see it similarly. And don't forget, along with the personal and corporate debt there's also governments of all levels debt.

With regard to insurers, Warren Buffet has spoken about the problems his insurance portfolio has faced for some time, plus now the very unpleasant effects to come if the increasingly-contemplated negative interest rates become widespread.

It's hard for younger people to appreciate that the extremely low interest rate environment they've known during their lives is not historically "normal", is an indicator of persistent systemic problems. I believe it's due to a lack of societal wealth creation, i.e. very few people I know, even those who have jobs, go off and create new wealth every day yet that doesn't seem to stop most of us from living quite well, materially. I don't get how that works, though I think the ever-increasing levels of debt by individuals and institutions might explain how it "works", but others may have better answers than me. But my point is that assuming the future will be similar to past patterns doesn't seem to me any more to be a solid basis for investment decisions, re banks or anything.

May 7, 2020
10:07 am
Alexandra
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I am a senior. I don't have a large pension as I get about 50% of what my pension would have been because I decided at the age of 48 .5 yrs to quit my full time government job. I owned my home and didn't have a penny worth of debt. I did however have some mortgage type investments and I lost around $70K less than a year after I retired. (I did take a buy-out from the government & invested all I could in that towards RRSP's) I didn't have a lot of RRSPs at the time because I thought it more prudent to pay off my house first. Anyway, part of the "buy out" was an education allowance. So, I went to a community college and got a certificate and later found employment . I worked for four years on a part-time basis til I recovered every penny I had lost in the mortgage investments. I quit all part time work at the age of 55. At the age of 54 I bought a small investment/rental property. I needed the cash flow as I wasnèt going to collect any pension til I was 60. I did purchase some stocks as well as mutual funds whilst I was in my 40ties but only held them for maybe 5 yrs then sold out. I havenèt purchased any since. Maybe I should buy them now because of the historically low interest rates but I am hesitant. I too have enough money and considerably more to last the rest of my life. Again, living fairly modestly. If I were to invest again in bonds, mutual funds or stocks; I wonder if it would be worth the anxiety of it all. After all, in the end it comes down to ......How much more do I need to leave to my daughter and one grandchild.

May 7, 2020
11:44 am
dougjp
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Like others have said, thanks Doug for all that work. I would guess many of us here have recently been looking at this subject much more than before, regardless if most or all of one's liquid assets are in cash or equivalents, or a good portion is already in the market.

At this point the biggest problem with interest earnings is within a RRIF/RRSP. The banks know we are trapped in there, can't escape from them with our cash and shop the rate market. Most of my RRIF is in stocks but I keep 1-2 years future withdrawals in cash. I also withdraw more than the annual minimum because I can make more in savings accounts outside the RRIF after paying tax on the interest, than I could ever earn inside the RRIF, not to mention the flexibility of having cash available and shifting to GICs etc.

My focus about this sharpened when a combination of 2 things happened. First, my online broker insisted, in the current circumstances, that pure cash had to exist in my RRIF account before I could buy anything, meaning, my savings account within the RRIF which happens to be owned by the same bank !, takes 2 days to settle a sale and appear as cash, even though this 'savings account' is like a mutual fund and settles in 1 day... This means acting on a stock purchase based on price during a day is impossible. Second, rates became so low, currently 0.3%, that I'm best to withdraw into cash earning nothing and wait, IF i intend to buy stocks.

It would be nice to expand the information to include major telecoms, BCE, Telus and Rogers. There's risk everywhere these days, but I can't help but think, with things shifting even more to electronics/online, the telecoms compare well in terms of risk to the banks. BCE and Telus both reported decent results today, and both stocks are down like the banks. Yes the politicians want to go after them and lots of spending on infrastructure is upcoming, but banks have future bad debts and reduced incomes.

The main accomplishment of almost all organized protests is to
annoy people who are not in them.

May 7, 2020
12:47 pm
Bill
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Alexandra, you say "I too have enough money and considerably more to last the rest of my life." I'd say you've achieved the goal, sit back and enjoy. I wouldn't take on anything that might risk you being able to say that in the future and/or cause you unnecessary anxiety in your remaining time. Also you indicate there would still be some left over to pass on, to augment the non-financial (e.g. values, memories, handicrafts, etc) legacy you leave daughter and grandchild, so mission accomplished there too.

May 7, 2020
12:59 pm
Vatox
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I agree. With no debts, plenty in savings and living off a meager income. I have no need for higher gains with risk. I will put some money in the market if it gets low enough.

May 7, 2020
1:57 pm
cruzinalong
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Alexandre said

I am looking at the problem of low interest rates for savers differently.

First of all, I don't consider in my financial planning to die rich - I am assuming how much of my savings and assets is left after I am dead would be irrelevant for me.

Secondly, I am at good place right now where I could modestly live off 3% interest, without touching principal. I agree with Doug that these interest rates will not come back any time soon.

So, this is what I am thinking. If I spend 3% of my current savings annually, I can keep spending for 33 years before I run out of money.

I will be honest with myself and will assume I won't live past 93 years of age. Not very many people do.

Which means, if I start taking 3% of my current savings at the age of 60, I'll be fine without investing in stocks and risking losing money due to potential volatility in the financial market. Yes, I know, some people strike rich by investing wisely, but I never won big in lottery or at casino and don't expect to, same with equities.

Well, what about modest inflation eating into real value of those 3% taken from principal annually? I plan to offset it by applying for CPP at the age of 60, followed by whatever else government will be kind to give me after I hit 65.

This is my plan.

PS. I also plan to liquidate all my RRSPs before I am 65, by gradually transferring everything to regular savings. For obvious reasons consistent with my plan.  

I took CPP at 60. I took OAS at 65. My reason sooner to spend it. I started withdrawing RRSP at 54. Did skiing that you stop doing after about 59. A friend stopped at the same age. Good idea to liquidate RRSP by 71. Good plan.

May 7, 2020
2:52 pm
canadian.100
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Alexandre said

First of all, I don't consider in my financial planning to die rich - I am assuming how much of my savings and assets is left after I am dead would be irrelevant for me.
  

That is a very interesting point.
I say that because numerous times I have been very surprised when I hear that various people (either whom I have known or have been known to my friends or family) who pass and we hear they leave a very substantial estate in many cases. They are usually at advanced age and their children in most cases are not so young and don't need the money at their stage of life.

This is probably a generational thing - middle aged people are not so concerned in stashing away a large estate to leave to whomever.

However, you may want to have enough savings because your last years in a Seniors home /Nursing home might be quite costly. These places are not cheap if you want to end your days at a decent place. (As we know many of these places are not decent.) Or if you want to remain in your own home, you may require to pay to hire support which again can be costly.

May 7, 2020
4:35 pm
Bill
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I've seen some people that focused on leaving lots of money behind appear to do so to try to compensate for other deficiencies they had as parents, e.g. too busy with career for much family time when kids were young, or raised kids in broken families, etc. I'm sure that's not the case all the time, but I've always felt that if you do things properly over the decades with your family it's not a big deal what money you leave behind.

cruzinalong, no need to stop, many people ski well into advanced age. My parents had a close lady friend that skied avidly until age 85 or so.

Long-term care (nursing) home rates in Ontario are set by gov't. Current (max) monthly rates are $1891, $2280 for semi-private room and $2701 for private. If you can't afford you can get subsidies up to $1891. Obviously if you're in a private sector retirement home or in your own residence you would likely need much more to pay for monthly care, food, accommodation, etc.

May 8, 2020
12:31 pm
JustMe2016
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Alexandre said

PS. I also plan to liquidate all my RRSPs before I am 65, by gradually transferring everything to regular savings. For obvious reasons consistent with my plan.  

Could you please enlighten me as to the benefits of taking all your money out of RRSP before age 65?

TBH I haven't yet looked at RRIF and annuity as I still have about a decade before reaching 71.

I'm in a somewhat similar situation as you. In fact I could earn 0% on my money until I die and I would still be fine.

In regards to the stock market, it all depends on what one is looking for. Usually the more money one has, the more toys one buys.... As the saying goes, bulls can fly, bears can fly, but pigs don't fly.

May 8, 2020
6:07 pm
cruzinalong
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JustMe2016 said

Could you please enlighten me as to the benefits of taking all your money out of RRSP before age 65?

TBH I haven't yet looked at RRIF and annuity as I still have about a decade before reaching 71.

I'm in a somewhat similar situation as you. In fact I could earn 0% on my money until I die and I would still be fine.

In regards to the stock market, it all depends on what one is looking for. Usually the more money one has, the more toys one buys.... As the saying goes, bulls can fly, bears can fly, but pigs don't fly.  

I have a friend that I did her tax return recently. It is interesting some of the things she does/does not do. Last December she had a zero balance in TFSA. I am pleased that she agrees with me on some things. She is forced to withdraw from a RRIF starting last year. No RRIF. I do not know if she ever had a TFSA or RRSP. An income tax return is only a snapshot for income last year. She collects very little interest. At 65 she collected OAS. Since her income is low she also collects GIS. It is amazing her income. I am convinced that she knows she has enough to last forever. When I was working I never knew how much to save.

May 9, 2020
7:30 am
Alexandre
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JustMe2016 said

Could you please enlighten me as to the benefits of taking all your money out of RRSP before age 65?

I am assuming I'll have very low personal income when I hit 65, as I'll stop working, and interest income from my savings will be close to zero.

Because of that, and because I'll keep living in Canada, I plan to apply for GIS (Guaranteed Income Supplement).

GIS payments are very dependent on income. As an oversimplification, for every dollar of income GIS payment is reduced by 50 cents.
That is equivalent to 50% income tax for those counting on GIS.

Mind you, RSP and RIF withdrawals are counted as an income in GIS payment calculations.

I have read sad story of a senior who asked her "community financial planner" if it is OK to withdraw few thousand dollars extra from RIF, and was told it is OK. Next year, she lost all her GIS.
For a single person, an income of $19,000 disqualifies them from GIS. So, you don't have to withdraw much from RSP/RIF to lose substantial source of post-retirement income coming from the government.

It makes RIF/RSP very unattractive for that specific case. As long as you can liquidate your RSP before age of 65 and get taxed less than 50% on annual income while you are doing it.

In summary, if you expect to be eligible for GIS by its current rules, strongly consider taking all money out of RSP by the time you are 64 years old.

That will be my plan.

PS. Also, I plan to fill up TFSA to the max just before my GIS eligibility, and have all my TFSA in just Savings or short term GIC. Even with low interest rates, every dollar not counted as taxable income adds a little to GIS payments.

May 9, 2020
7:38 am
mechone
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Bought more BMO, Manulife , Suncor , Enbridge and a few U.S stocks last week and made a load of money this week , if it goes up or down don't care they are all paying dividends and over time will all go up

May 9, 2020
2:47 pm
cruzinalong
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mechone said
Bought more BMO, Manulife , Suncor , Enbridge and a few U.S stocks last week and made a load of money this week , if it goes up or down don't care they are all paying dividends and over time will all go up  

Excellent planning. All in different segments. They will do well.

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