Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

A higher dividend yield isn’t always better: How to spot the good from the bad to avoid this costly mistake.

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is higher yield dividend better

Investors interested in dividends should only buy the highest-yielding Canadian dividend stocks if they meet these criteria — and don’t have these risk factors

Dividend yield is the percentage you get when you divide a company’s current yearly payment by its share price.

The best of the highest-yielding Canadian dividend stocks have a history of success

Follow our Successful Investor philosophy over long periods and we think you’ll likely achieve better-than-average investing results.

Our first rule tells you to buy high-quality, mostly dividend-paying stocks. These stocks have generally been succeeding in business for a decade or more, perhaps much longer. But in any case, they have shown that they have a durable business concept. They can wilt in economic and stock-market downturns, like any stock. But most thrive anew when the good times return, as they inevitably do.

Over long periods, you’ll probably find that a third of your stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

Canadian dividend stocks and the dividend tax credit

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit — which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA — will cut your effective tax rate.

That means dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

The Canadian dividend tax credit is actually split between two tax credits. One is a provincial dividend tax credit and the other is a federal dividend tax credit. The provincial tax credit varies depending on where you live in Canada.

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Dividend yields are generally lower today than they were a few years ago, but it’s still safe to assume that dividends will continue to supply perhaps a third of the market’s total return over the next few decades. Continue Reading…

A closer look at Inflation

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By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Content)

While inflation was sidelined by several central banks and deemed as “transitory” for the most part during 2021, the tone shifted promptly this year as back-to-back red-hot inflation prints forced most central banks to go on an interest-rate hiking spree. This aggressive action is being taken to tame inflation otherwise known as the rate of change in prices over time, [1], as it’s persistently high and is eroding the purchasing power of households, reducing consumer spending, and the overall economic well-being.

What are the causes of inflation?

Before we discuss whether inflation will slow down or not, let’s take a step back and analyze what’s causing prices to rise globally in the first place. Most economists attribute this uptick in inflation to several different causes such as:

  • Cost-push inflation driven by supply chain crisis

The COVID-19 outbreak led to a series of lockdowns and restrictions across the globe, which caused supply chain disruptions and labour shortages and ultimately induced cost-push inflation [2], resulting in a surge of prices due to an increase in costs of producing and supplying products and services. World economies are still recovering from this effect, and some of these constraints are fading away as global transportation costs plunge and Chinese production ramps up again. However, the Russian invasion of Ukraine is clearly hampering this progress and further stoking inflation.  [3]

  • Demand-pull inflation fueled by savings, fiscal stimulus, and monetary policy

The pandemic had caused an unconventional recession, and to keep economies afloat, several central banks slashed their interest rates, increased their money supply M2 (a measure of the money supply that includes cash, checking deposits, and easily- convertible near money)., gave out government aid, relief, & stimulus payments as part of the fiscal response during 2020 & 2021. As businesses reopen this year after remaining shuttered and reducing their production and services, they could not meet the pent-up demand driven by savings accumulated during the pandemic along with the monetary & fiscal stimulus. Thus, strong consumer demand, fueled by robust growth in employment, has outstripped supply temporarily for several products & services such as air travel, hotels, cars, etc., resulting in demand-pull inflation [4].

 

A series of interest rate hikes to curb sky-high inflation

The price increases for gasoline, food, and housing caused Canada’s inflation to rise to a 39-year high of 8.1% in June 2022. The markets got some respite in August as headline inflation came down to 7% and further weakened in September to 6.9% from a year ago, as gasoline prices fell. However, the recent data was disappointing as the dramatic increase in food prices was unexpected.

On a similar note, south of the border, the U.S. inflation spiked to 9.1% in June 2022, the highest level since 1981. Although headline U.S. inflation reported for September was up by 8.2% from a year earlier (down from the peak of June 2022), the core U.S. consumer price index (ex. food & energy) rose to a 40-year high, increasing to 6.6% from a year ago, which is a cause of concern as its squeezing households by outpacing the growth in wages.

To dial down the surge in prices, the Federal Reserve engaged in a series of rate hikes not seen since the late 1980s, increasing the front-end interest rate to 3.25% in September. The Bank of Canada followed suit by raising rates through consecutive outsized hikes, bringing its target overnight rate to 3.75% in October. Given inflation is still sky-high in both countries and way above their 2% target, both Fed & Boc are expected to raise their short-term rates again. Both central banks are maintaining their hawkish tones, which means the rates will be further raised to fight against raging inflation. However, they may dial back the pace of their hikes amid recession fears.

When will we see a slowdown in inflation?

Looking at recent CPI prints, the question arises whether the U.S. and Canada have passed peak inflation. The truth is it’s hard to predict what lies ahead. Prices in some sectors, such as gas and used automobiles, have dropped, which is a good sign. However, prices for certain goods & services are “stickier” than others, such as rent, insurance, health care or dining out, meaning that they are likely to stay at their current levels or increase even further, so inflation may stick around for a while. Moreover, higher wages and inflation may continuously feed into each other, resulting in a wage-price spiral [5] which may result in further rate hikes, causing additional damage. Continue Reading…

Retired Money: Are Balanced Funds really dead or destined to rise again?

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Is the classic 60/40 balanced fund destined to rise again, like the phoenix?

My latest MoneySense Retired Money column addresses the unique phenomenon investors have faced in 2022: for the first times in decades, both the Stock and Bond sides of the classic balanced fund or ETF are down.

Click on the highlighted headline to access the full column: The 60/40 portfolio: A phoenix or a dud for retirees? 

While the column focuses on the Classic 60/40 Balanced Fund or ETF, the insights apply equally to more aggressive mixes of 80% stocks to 20% bonds, or more conservative mixes of 40% bonds to 60% stocks or even 80% bonds to 20% stocks. Most of the major makers of Asset Allocation ETFs provide all these alternatives. Younger investors may gravitate to the 100% stocks option: indeed with most US stocks down 20% or more year to date, it’s an opportune time to load up on equities if you have a long time horizon.

However, we retirees may find the notion of 100% equity ETFs to be far too stressful in environments like these, even if the Bonds complement has thus far let down the tea. As Vanguard says in a backgrounder referenced in the column, the classic 60/40 may yet rise phoenix-like from the ashes of the 2022 doldrums.

“We’ve been here before.”

On July 7th, indexing giant Vanguard released a paper bearing the reassuring headline “Like the phoenix, the 60/40 portfolio will rise again.”  “We’ve been here before,” the paper asserts, “Based on history, balanced portfolios are apt to prove the naysayers wrong, again.” It goes on to say that “brief, simultaneous declines in stocks and bonds are not unusual … Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That’s a month of joint declines every seven months or so, on average. Extend the time horizon, however, and joint declines have struck less frequently. Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.”

Vanguard also urges investors to remember that the goal of the 60/40 portfolio is to achieve long-term returns of roughly 7%. “This is meant to be achieved over time and on average, not each and every year. The annualized return of 60% U.S. stock and 40% U.S. bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%. Going forward, the Vanguard Capital Markets Model (VCMM) projects the long-term average return to be around 7% for the 60/40 portfolio.”

It also points out that similar principles apply to balanced funds with different mixes of stocks and bonds: its own VRIF, for example, is a 50/50 mix and its Asset Allocation ETFs vary from 100% stocks to just 20%, with the rest in bonds.

Tweaking the Classic 60/40 portfolio

While very patient investors may choose to wait for the classic 60/40 Fund to rise again, others may choose to tweak around the edges. The column mentions how TriDelta Financial’s Matthew Ardrey started to shift many client bond allocations to shorter-term bonds, thereby lessening the damage inflicted to portfolios by bond funds heavily concentrated in longer-duration bonds. Continue Reading…

Harvest launches 5 new ETFs designed for higher income

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The new ETFs invest directly in established equity income ETFs but generate higher income through a specific strategy

By Michael Kovacs, President & CEO of Harvest ETFs

(Sponsor Blog)

Canadian investors — in large numbers — are seeking income from their investments. Some investors are seeking high monthl income to offset the rising cost of living. Others are incorporating the income paid by their investments in total return. Whatever the reason, many of those investors are finding the income they seek in equity income ETFs.

Equity Income ETFs have seen strong inflows in 2022, in a period when traditional equities have struggled. These ETFs — which generate income from a portfolio of stocks and a covered call strategy — offer yields higher than the rate of inflation and higher than most fixed income.

Harvest ETFs has seen over $1 billion in assets flow into its equity income ETFs so far in 2022, as investors seek high income from portfolios of leading equities from a reputable provider. Now, Harvest is launching 5 new ETFs to build on that reputation and demand for higher income.

The appetite for equity income among Canadian investors has grown and grown. We’re pleased to be launching these new enhanced equity income ETFs to help meet that demand and provide Canadians with the high income yields they’re seeking in today’s market.

The ETF strategies getting enhanced

Harvest has launched the following new enhanced equity income ETFs, with initial target yields higher than their underlying ETFs.

Name Ticker Initial Target Yield
Harvest Healthcare Leaders Enhanced Income ETF HHLE 11.0%
Harvest Tech Achievers Enhanced Income ETF HTAE 12.8%
Harvest Brand Leaders Enhanced Income ETF HBFE 9.70%
Harvest Equal Weight Global Utilities Enhanced Income ETF HUTE 10.20%
Harvest Canadian Equity Enhanced Income Leaders ETF HLFE 9.60%

We selected 5 established equity income ETFs to underpin our new enhanced equity income ETFs. They reflect our core investment philosophy, owning the leading businesses in a specific growth industry and generating income with covered calls.

Each enhanced equity income ETF has specific tailwinds from its underlying ETF. HHLE captures the superior good status of the healthcare sector by owning the Harvest Healthcare Leaders Income ETF (HHL:TSX). HTAE accesses a portfolio of established tech leaders in the Harvest Tech Achievers Growth & Income ETF (HTA:TSX). HBFE provides exposure to some of the world’s top brands through the Harvest Brand Leaders Plus Income ETF (HBF:TSX). HUTE captures a defensive global portfolio of utilities providers through the Harvest Equal Weight Global Utilities Income ETF (HUTL:TSX) and HLFE offers access to some of Canada’s leading companies by owning the Harvest Canadian Equity Income Leaders ETF (HLIF:TSX).

How the Enhanced Equity Income ETFs will deliver a higher yield

These new enhanced equity income ETFs use leverage to deliver high income. They apply a leverage component of approximately 25% to an existing Harvest equity income ETF. That leverage raises the annualized yield of the ETF while elevating the risk-return profile and the market growth prospects of the ETF.

The graphic and example below shows how a hypothetical enhanced ETF investment can work: Continue Reading…

4 easy ways to Build Wealth: at any Age

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By Emily Roberts

For the Financial Independence Hub

Whether you’re just starting out or planning for retirement, there are ways to build wealth at any age. There is no golden age when building wealth; the wealth gap is reducing. If you want to grow your savings and assets, you must take action regardless of your life stage. Here are five easy tips for increasing your assets at any stage of life.

Start Saving early

If you start saving early, you’ll have plenty of time to compound your interest and grow your savings. Even small amounts of money can make a big difference over time. The earlier you start saving, the less you have to save each month from reaching your goal. If you start saving at 25, you’ll have to save $100 each month to have the same amount saved at 65. If you start saving at 35, you’ll have to save $300 each month to reach the same amount saved at 65. While it’s never too late to start, the earlier you start saving, the less you have to save each month from reaching your goal.

Pay off High-interest Debt ASAP

Credit cards can be dangerous because they’re easy to use for small purchases, and you may not notice the interest growing. If you don’t pay off your credit card in full each month, you’ll pay the credit card company more than the original purchase price. You can pay off your debts with a debt consolidation plan, and you can speak with a specialist like Harris & Partners to learn more about how debt consolation works. Debt consolidation helps you achieve a balanced and focused loan payment that is adjusted to your financial situation. In this way, you can free up more funds for investments and get out of debt faster. Continue Reading…