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The Quest for Income as rates fall
October 15, 2024
10:09 am
ExtraSauce
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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.

Treading water with increasing RRSP drawdowns seems to be a plan.

Ideas?

October 15, 2024
11:34 am
ExtraSauce
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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.

Treading water with increasing RRSP drawdowns seems to be a plan.
Ideas?  

FWIW:
"The market remains near all-time highs, a pattern often observed before major downturns. Despite the positive short-term signals, investors should remain cautious, as the economy could shift rapidly. Historical patterns show that markets can rally despite underlying negative indicators, only to experience sharp reversals once external shocks or economic slowdowns hit. This was evident in the periods leading up to the 2001 and 2008 recessions, where optimism and strong market performance preceded significant downturns."

https://www.bnnbloomberg.ca/markets/2024/10/15/mike-philbricks-top-picks-for-october-15-2024/

October 15, 2024
1:27 pm
AltaRed
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There are as many opinions on the current state of the stock market as there are analysts. The TSX Composite has trailed the performance of the US stock market in particular and has plenty of room to grow. More importantly for Canadians, Canadian blue chip dividend stocks have been lagging the general market and dividend yields remain strong.

The TSX60 (60 largest stocks in the Canadian market) as represented by the likes of XIU https://www.blackrock.com/ca/investors/en/products/239832/ishares-sptsx-60-index-etf#/ has provided a solid, and growing, eligible dividend investment income stream for almost the entirely of its 25 year existence. While market value of this ETF will fluctuate with market conditions, sometimes wildly, its generation of investment income has been growing year by year, the occasional bump due to varying capital gains components notwithstanding. Go to https://seekingalpha.com/symbol/XIU:CA/dividends/history and click on Max for the 25 year history of dividend payouts.

Everyone should have some of this ETF, or one of its peers, in their portfolio to supplement interest income from their fixed income investments.

October 15, 2024
1:50 pm
mordko
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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.

October 15, 2024
4:12 pm
ExtraSauce
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AltaRed said
There are as many opinions on the current state of the stock market as there are analysts. The TSX Composite has trailed the performance of the US stock market in particular and has plenty of room to grow. More importantly for Canadians, Canadian blue chip dividend stocks have been lagging the general market and dividend yields remain strong.

The TSX60 (60 largest stocks in the Canadian market) as represented by the likes of XIU https://www.blackrock.com/ca/investors/en/products/239832/ishares-sptsx-60-index-etf#/ has provided a solid, and growing, eligible dividend investment income stream for almost the entirely of its 25 year existence. While market value of this ETF will fluctuate with market conditions, sometimes wildly, its generation of investment income has been growing year by year, the occasional bump due to varying capital gains components notwithstanding. Go to https://seekingalpha.com/symbol/XIU:CA/dividends/history and click on Max for the 25 year history of dividend payouts.

Everyone should have some of this ETF, or one of its peers, in their portfolio to supplement interest income from their fixed income investments.  

time is the key here.

Thanks for your thoughts. I agree that XIU is a good idea for long term hold, if it too was not at an all time high and I was a little younger. I've been in the market off and on since the ninetys and the times I've made the most was when patient and buying near the lows. Conversly, I've got slaughtered buying into strength after runups.

October 15, 2024
4:46 pm
ExtraSauce
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mordko said

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:

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.  

==============================

Long term in the market, especially with the considerable likelihood of a market pullback, is a luxury afforded to those with less miles on their odometer.

My recent focus has transitioned from a once in a lifetime 2020 post covid fill-your-boots buying opportunity that realized considerable gains and has afforded me to retire with nary a care. In all selfishness, I'd like the Fed & BoC to keep rewarding savers so we could continue to not give a dam about market fluctuations. Hope springs eternal 😉

October 15, 2024
5:00 pm
yayyayyay
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I like this article on a hypothetical situation about having terrible market timing. But again, investing in stocks is not recommended for money you'll need in the next 5 years.

I also read that right now stock and bond prices are correlated due to inflation.

Man, my savings really enjoyed the high interest rates.

October 15, 2024
5:14 pm
AltaRed
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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.

October 15, 2024
6:13 pm
mordko
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ExtraSauce said

==============================

Long term in the market, especially with the considerable likelihood of a market pullback, is a luxury afforded to those with less miles on their odometer.

My recent focus has transitioned from a once in a lifetime 2020 post covid fill-your-boots buying opportunity that realized considerable gains and has afforded me to retire with nary a care. In all selfishness, I'd like the Fed & BoC to keep rewarding savers so we could continue to not give a dam about market fluctuations. Hope springs eternal 😉  

Fair enough re odometer and being comfortable. And great job filling your boots (during?) covid in 2020. If there is no need and desire to be in the market that’s great but then waiting for a large pull back makes no sense. Not all recoveries are as fast as after March 2020. And given that you already realized gains, you’ll be likely re-entering at a higher price point even with a large pullback.

For fixed income, I am:
- shortening duration of bonds because that's what the curve is telling me to do
- diversifying out of Canada because Canada is first to cut rates and the likes of US are behind us, so more potential gains
- still have a bunch of GICs from the last 24 months
- some CIB238, which is a money market fund.

Lots of options for now, it's not 2019.

October 15, 2024
8:12 pm
ExtraSauce
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mordko said

Fair enough re odometer and being comfortable. And great job filling your boots (during?) covid in 2020. If there is no need and desire to be in the market that’s great but then waiting for a large pull back makes no sense. Not all recoveries are as fast as after March 2020. And given that you already realized gains, you’ll be likely re-entering at a higher price point even with a large pullback.

For fixed income, I am:
- shortening duration of bonds because that's what the curve is telling me to do
- diversifying out of Canada because Canada is first to cut rates and the likes of US are behind us, so more potential gains
- still have a bunch of GICs from the last 24 months
- some CIB238, which is a money market fund.

Lots of options for now, it's not 2019.  

Good to hear how you're dealing with changes going forward. I've been using TDB8150 for trading account but it is tanking. How does CIB238 compare?

To clarify, I 'filled my boots' in the market in the weeks following the Covid crash around April to May in 2020. I've since sold almost everything except some utilities, a bit of mid sized CDN oil and a few Covered call ETF's for yield.

I'm not averse going all into a market that has a black swan event, but am very reluctant to buy and hold stocks and ETF's now after they have run up.

Your point about pullbacks not necessarily being deep is well taken. At my age now and with a desire to maintain capital, I would rather just sit back and continue to take the income from GIC's but may have to get back into the markets to maintain income sometime.

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.

October 15, 2024
8:58 pm
mordko
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Mmf CIB 238 has effective yield of 4.23% but they are all dropping and will continue doing so for the next few month. TDB8150 is an isa and the rate is a bit lower. Still, more than double inflation for now; can’t complain. You need a min of $100k to buy class F. TDDI is bribing me with a further 2% under a deal which is no longer available but there will likely be other inducements of this nature if you are prepared to change brokerages.

October 15, 2024
9:39 pm
ExtraSauce
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mordko said
Mmf CIB 238 has effective yield of 4.23% but they are all dropping and will continue doing so for the next few month. TDB8150 is an isa and the rate is a bit lower. Still, more than double inflation for now; can’t complain. You need a min of $100k to buy class F. TDDI is bribing me with a further 2% under a deal which is no longer available but there will likely be other inducements of this nature if you are prepared to change brokerages.  

A brokerage shift to CIBC is not in my cards, dealing with too many financial institutions now. Who is TDDI that is negotiating a sweetened deal?

October 16, 2024
5:06 am
mordko
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ExtraSauce said

A brokerage shift to CIBC is not in my cards, dealing with too many financial institutions now. Who is TDDI that is negotiating a sweetened deal?  

You can buy CIB238 at other brokerages. I bought it through TDDI. Periodically brokerages offer incentives to transfer money to them, typically on the range of 0.5 to 1%.

October 16, 2024
7:56 am
AltaRed
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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.

October 16, 2024
8:00 am
qzjxk
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For income I'm holding BK.PR.A, FTN.PR.A, DFN.PR.A and some REITs.

October 16, 2024
8:04 am
AltaRed
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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.

October 16, 2024
8:20 am
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Those are not typical preferred shares, they are part of a split share corporate fund. But I agree, they are not for novices.

October 16, 2024
8:31 am
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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.

October 16, 2024
8:38 am
Norman1
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AltaRed said

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. …

That's because such funds mindlessly rollover their bonds and don't have a maturity date when all the bonds mature and reach a predictable value.

There's some effort to address that with funds that do have a maturity date. Guardian Capital's GuardBonds funds are an example.

October 16, 2024
8:53 am
mordko
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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.

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