All posts by Financial Independence Hub

Harvest launches HRIF – a multi-sector income ETF with no leverage

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Image courtesy Harvest ETFs/Shutterstock

By Michael Kovacs, President & CEO of Harvest ETFs

(Sponsor Blog) 

The Harvest Diversified Monthly Income ETF (HDIF:TSX) was built to meet Canadian investors’ need for income and sector diversity. We built it with a straightforward thesis, by holding an equal weight portfolio of established Harvest Equity Income ETFs, we could deliver growth potential and high monthly income. That made it one of the most popular Canadian ETFs launched in 2022.

Each of the ETFs held in HDIF captures a portfolio of leading large-cap businesses. They also each employ an active and flexible covered call option strategy to generate high income yields, offset downside, and monetize volatility. HDIF combined those ETFs with modest leverage at approximately 25% to deliver an enhanced income yield.

In April of this year, we launched the Harvest Diversified Equity Income ETF (HRIF:TSX). It holds the same equal-weight portfolio of Harvest ETFs, but without the use of leverage. Put simply, leverage adds a level of risk that some investors are not comfortable with. Therefore HRIF can deliver that same diversified portfolio of underlying ETFs and a high income yield in a package that more risk-averse investors may want to consider.

A truly diversified portfolio

At Harvest ETFs, we always start with portfolios of what we see as high-quality businesses. The ETFs held in HRIF capture companies that lead their sectors. By combining those portfolios into a single ETF, HRIF delivers a very diverse exposure to these companies.

The equal-weight portfolio held by HRIF at launch holds the following six ETFs.

Each ETF holds a portfolio of leading companies in their particular sector and market area. We define that leadership through quantitative and qualitative metrics such as market cap, market share, performance history and — in the case of certain underlying ETFs — dividend payment history. The companies selected in each ETF’s portfolio demonstrate leadership across those metrics.

HRIF also delivers a diverse set of performance drivers. Tech has been a market growth leader for over a decade and remains a key allocation for investors. Healthcare shows significant defensive qualities, especially during inflationary and recessionary times. The brand leaders in HBF and Canadian leaders in HLIF are selected in large part due to their resilience across market cycles, market shares, and dividend payment history. US banks have faced headwinds lately but have long-term positive exposure to interest rate increases and remain structurally important to the global economy. Utilities are an almost textbook definition of defensiveness, providing stability and ballast for the ETF.

Taken together, HRIF delivers leadership from a wide set of companies which, combined with its high income yield, makes it an attractive ETF for many investors.

HRIF’s High Income Yield Explained

HRIF launched with an initial target yield of 8.0% annually, paid as monthly cash distributions. That yield is earned by combining the underlying yields of its component ETFs, each of which employ an active & flexible covered call option strategy.

Covered call option ETFs effectively trade some upside potential for earned income premiums by ‘writing’ calls on a percentage of the ETF’s holdings. Where many covered call option ETFs use a passive strategy, writing calls on the same percentage of holdings each month, the Harvest ETFs held in HRIF use an active strategy. Continue Reading…

Why my goal to live off dividends remains alive and well

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Image myownadvisor/honestmath.com

By Mark Seed, myownadvisor

Special to Financial Independence Hub

Some time ago…yours truly wrote a controversial post about the intent to live off dividends and distributions from our portfolio.

Well, a great deal of time has passed on that post by my thinking and goals remain the same – as least in part for semi-retirement!

Read on to learn why my approach to live off dividends remains alive and well this year in this updated post.

Why my goal to live off dividends remains alive and well

First, let’s back up to the controversy and offer a list why some investors couldn’t care less about my approach and why dividends may not matter at all to some people:

  1. The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair. 
  2. Dividends are not magical – there is nothing special about them. Sure.  
  3. A dollar of dividends is = a one-dollar increase in the stock price. True, a dollar is a dollar. 
  4. Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that. 
  5. You can never possibly know long-term how dividends may or may not be paid by any company. Fair. 

In many respects these investors are not wrong.

You do need a bunch of capital to generate income.

Dividends are part of total return. [See image at the top of this blog.]

Stock selection can open up opportunities for market under performance.

And the negativity doesn’t stop there …

Some financial advisors will argue your investing world starts to shrink if you demand 2% or 3% (or more) income from your portfolio, so dividend investing leads to poor diversification.

My response to this: I don’t just invest in dividend paying stocks. 

Further still, some advisors will argue picking dividend paying stocks may lead to negative outcomes and too many biases.

My response to this: while I believe markets are generally efficient, I also believe that buying and holding some dividend paying stocks (while there could be market under-performance at times) does not necessarily mean I cannot achieve my goals. In fact, that’s the entire point of this investing thing anyhow – investing in a manner that keeps you motivated, inspired and helps you meet your long-term goals.

Consider this simple sketch art from Carl Richards, who is far more famous than I will be, and author of the One-Page Financial Plan and more:

Keep Investing Super Simple - Goals and Happiness

Source: Behavior Gap.

From Carl’s recent newsletter in my inbox:

“Pretend you live in some magic fantasy world where all of your dreams (according to the investment industry) come true, and you actually beat an index every quarter for your whole life. Congratulations!

So here’s my question: You landed in Shangri La, according to the financial industry. You beat the index. But you didn’t meet your goals. Are you happy?

The answer is “No.”

Now let’s flip that scenario on its head. The worst thing in the world happens to you (again, according to the investment industry). You slightly underperform the index every quarter for your whole life. But because of careful financial planning, you meet every one of your financial goals. Let me repeat the question: Are you happy?

And the answer is obviously… “Yes.”

Stop worrying about beating indexes. Focus instead on meeting your goals.”

Amen.

Finally, some advisors will argue that dividends and share buybacks and other forms of reinvesting capital back into the business can be equally shareholder friendly.

My response to this: Well of course that makes sense. Dividends are just one form of total returns.

But you know what?

The ability to live off dividends (and distributions from our ETFs) will be beneficial for these reasons:

1. I continue to believe there are simply too many unknowns about the financial future. So, living off dividends and distributions will help ensure our capital remains hard at work since it will remain intact.

2. If we are able to keep our capital intact we don’t need to worry as much about when to sell shares or ETF units when markets don’t cooperate. We can sell assets as we please over time.

3. Living off dividends is therefore just one way I’m trying to reduce sequence of returns risks. See below.

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Source: BlackRock.

As such, we’ll try to live off dividends and distributions in the early years of semi-retirement to avoid such risks.

4. I/we don’t necessarily believe in the 4% safe withdrawal rule. It’s impossible to predict next year, let alone 30 or more investing years.

5. I’m conservative as an investor. Seeing dividends roll into my account help me psychologically to stick to my investing plan.

6. Dividends is real money, tangible money I can spend if and when I choose without worrying about stock market prices or gyrations.

7. It is my hope dividends (and capital gains) can work together to help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services will rise in price along with them.

8. I like dividend paying stocks for a bit of the “value-tilt” they offer. 

9. Canadian dividend paying stocks are tax-efficient. With my RRSP growing more with U.S. assets, I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account.

In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government. This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income. This will help me in the years to come.

Will I eventually spend the capital from my portfolio?

Of course I will.

But with a “live off dividends” mindset I can sell assets or incur capital gains largely on my own terms during retirement. I plan to do just that.

Why my goal to live off dividends remains alive and well summary

This site continues to share a journey that includes how passive dividend income can fulfill many of our retirement income needs – whether that might be covering our property taxes, paying our utility bills, delivering enough monthly income to cover our groceries, fund some international travel or all of these things combined.

Here was one of my recent updates below.

We’re now averaging over $3,300 per month from a few key accounts.

(Hint: likely more next month!)

We’re trending in a great direction thanks to this multi-year investing approach and I have no intentions of changing my/our overall approach.

I firmly believe our focus on the income that our portfolio generates, instead of the portfolio balance, is setting us up to deliver some decent semi-retirement income.

Our goal to live off dividends and distributions remains very much alive and well for the years ahead.

I look forward to your comments.

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on March 27, 2023 and is republished on the Hub with his permission.

Do you really need an Emergency Fund?

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Photo by Mark König on Unsplash

By Anita Bruinsma, CFA

Clarity Personal Finance

One of the most agreed-upon financial planning concepts is the importance of an emergency fund. Having quick access to money to pay for an unexpected expense or job loss can prevent unwanted credit card debt and can lower stress levels.

Not everyone is on board though. Some people feel that keeping money in cash instead of investing it means you’re sacrificing too much potential growth. This might be a particularly true for people who are targeting financial freedom. Since investing is an important component of reaching financial goals, it’s understandable that you don’t want to drag down your overall rate of return by holding cash.

Having access to money for unexpected expenses, though, is important for pretty much everyone. So do you need an emergency fund and if you do, how much should it be?

Do you need an emergency fund?

If you have a home equity line of credit (HELOC), you might not need funds sitting in a savings account. Whether it’s a good idea to depend on your HELOC as an emergency fund depends on two main factors: if you had to borrow from it, how long would it take you to pay if off and what is the rate of interest you’re paying?

Generally, as long as the rate of interest on the line of credit is below what you could expect to earn in the stock market, and assuming you’re able to pay down the line of credit within a reasonable time period, then using your line of credit isn’t a bad idea. The key is to make sure you are disciplined in paying down the line of credit quickly, otherwise the interest cost will outweigh what you could earn in the market.

How much do you need?

For those who don’t have a HELOC or who prefer to have a safety net in cash, determining the right amount of money to keep in an easy-to-access, low-return account is important.

There are really two kinds of emergency funds: one that will pay your expenses if you lose your job or can’t work for a period of time, and one that will pay for the large, unpredictable expenses that crop up in everyday life.

The job loss emergency fund

Job loss can mean you were laid off or that you can’t work due to illness, an accident, or a personal/family crisis. You might have heard the standard advice that says you need 3-6 months’ worth of living expense to protect against a job loss. Like all personal finance shortcuts, this isn’t necessarily helpful. How much you need in an emergency fund is highly dependent on your situation.

Here are the main factors that influence how much you should have set aside in your job loss emergency fund:

  1. Do you have job stability? If your industry is known for sudden layoffs or if your role might be considered non-essential to an organization, you have a higher risk of losing your job and it might take you longer to find a new one. It would be wise to have a bigger cushion than someone who works in a stable industry or performs an essential role.
  1. Do you have disability insurance? If you have an accident or get really sick, you’ll receive some kind of payment while you have to take time off work. It won’t necessarily be enough but it will help and you’ll need a smaller emergency fund. If you expect to receive no pay if you need to take time off work, you need a bigger emergency fund.  
  1. What kind of lifestyle do you want to maintain? If you are laid off, you’ll need to pare back your spending. But to what extent? What do you consider to be “essential”? Are the kids’ swimming lessons essential? What about your gym membership? Understanding what essential means to you will help you decide how much to set aside.
  1. Do you have a partner or spouse? If you have a partner or spouse with whom you share the financial responsibilities of running a household and they are employed, would they be able to cover the essentials if you lost your job? How would your lifestyle be impacted? What is their job stability like? Do they work in the same industry as you do? If so, there might be a higher risk of both of you being laid off at the same time.
  1. Do you have savings in a TFSA or a non-registered account? If all of your money is in RRSPs or your pension, you don’t have any good options for withdrawing money in an emergency. However, you could choose to rely on your TFSA or non-registered funds for a portion of your needs.

The large expense emergency fund

For your large expense emergency fund, the amount you want to have available depends on how many opportunities for unexpected expenses you are exposed to and what other resources you could draw on. Continue Reading…

Tips for Buying a House for those with Poor Credit

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Image Pixabay

By Brittany Cotton

Special to Financial Independence Hub

For people with bad credit, the experience of buying a home can be quite difficult and daunting. It’s a tricky time that necessitates careful planning and preparation.

However, despite the difficulties that low credit scores may present, there are several tips and strategies you can employ to help you navigate the home-buying process. This article highlights some of these innovative strategies.

How to Buy a Home with Less than Stellar Credit

Here are some pointers to help you buy a home even if you have bad credit:

Consider Special Programs

There are numerous loan programs that do not require a high credit score or a down payment if you are a first-time homebuyer or have a low income. Some options [in the United States] to consider include USDA loans, VA loans, and the Fannie Mae HomeReady and Freddie Mac HomeOne and Home Possible loan programs.

Look for the Best Deal

Different mortgage brokers offer various rates of interest, so shop around to find the best deal. According to studies, trying to compare multiple rate quotes could save you a substantial amount of money in the long run.

Look into Down Payment Assistance

If you’re concerned about saving for a down payment, there are more than 2,500 down payment support programs available across the country for which you could be eligible. However, you need to avoid major financial changes. Taking on new debt or making a large purchase can lower your credit score, so avoid doing so while applying for a mortgage.

Things you should know about the Homebuying Process

Before you start looking for a house, you should educate yourself on the ins and outs of house purchases. Here’s a rundown of some key points to keep in mind:

Recognize why you want to Buy a House

Buying a house is a significant investment that shouldn’t be taken lightly. If you don’t know why you would like to buy a house, you may come to regret your decision later on.

Check your Credit Score

Your credit score will help you in evaluating your payment plans; lenders use it to set loan pricing and determine if you can repay your mortgage. The more favorable your credit history, the better your chances of obtaining financing at the best terms and rates. Continue Reading…

Defined Benefit pension plans continue to perform, despite ongoing market volatility

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Image Mercer/Getty Images

By F. Hubert Tremblay, Partner, Mercer Canada

Special to Financial Independence Hub

 The last few years have thrown a number of hurdles on the markets. A pandemic and the recovery phase have been accompanied by recent additional uncertainty from the collapse of Silicon Valley Bank and fears of a global banking crash. Canadians looking at their retirement savings realize how volatility can affect their accounts and might have to save more to meet their retirement objectives or delay retirement.

Despite this volatility, the financial positions of defined benefit (DB) pension plans continued to improve over the last quarter, as indicated by the Mercer Pension Health Pulse (MPHP).

The MPHP, which tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, rose in Q1, finishing the quarter at 116 per cent, a jump of 3 per cent from the beginning of 2023. This is on top of a remarkable jump of 10 per cent during 2022.

While the global banking crisis continues to wreak havoc on markets, a strong January and February helped ensure that Canadian DB plans remained unaffected, and most continued to improve. In fact, many plans’ funded positions finished the quarter in better positions than they have been in 20 years. However, looking ahead, there are several factors that may create more volatility and uncertainty for DB plans:

 The global economy at play

The global economy entered 2023 juggling multiple risks. Around the world, central banks were focused on tackling inflation by increasing their policy interest rates and other qualitative tightening activities. On the heels of the failure or takeover of high-profile banks in both the U.S. and Europe, policymakers must now weigh the consequences of continuing these tightening measures with the need to stabilize the banking sector overall.

The war in Ukraine – with no signs of resolution in the near future – could also mean continued global tensions and a reduction in global trade, all of which will negatively impact the global economy.

In North America, there is increased political polarization in the U.S., with the debt ceiling needing to be raised but neither side compromising to reach an agreement. The consequences of the American government debt default would be disastrous for global financial markets.

 The Canada equation

North of the border in Canada, in addition to the inflation scenario, Ottawa’s decision to cease issuing real return bonds (RRBs) and proceed with Bill C-228 caused a stir among pension stakeholders. Continue Reading…