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We haven’t checked the email box for a while, so let’s see what financial questions readers are asking.
Q – I have a significant amount of my RRSP invested in Purpose High Interest Savings ETF (PSA-T) as the more conservative part of my total portfolio. The yield still seems quite good despite reducing interest rates, but I expect it will eventually fall as interest rates fall.
Do you believe I should be shifting this money into bond ETFs and REITs now? Please consider that this is an area of my portfolio where I would like to take less risk but would like to target a similar return to PSA if possible, around 5 per cent. (Name withheld by request.)
A – This is really a question about how to have your cake and eat it too. Returns on “safe” securities like deposit accounts, money market funds, cash-based ETFs, and GICs are falling. So, where can you find a similar return with comparable low risk? Answer: nowhere.
Let’s start with the PSA fund. If you look at the distribution history, you’ll see the monthly payouts have been trending down since the Bank of Canada started cutting rates. In May, investors received 22.1 cents per unit for a yield of slightly over 5 per cent based on the trading price at that time. The September distribution was 16.70 cents.
The units trade in a narrow range ($50-$50.24 over the past year) and will likely continue to do so. The yield would be 4 per cent based on the September distribution and a recent price of $50.10. The monthly payouts vary so that number will vary but the yield trendline over the next 12 months will likely be down.
So, what about your other suggestions?
The bond market recovery is quite uneven, due to the effects of the inverted yield curve. That will correct itself over time, but a 5 per cent yield on any bond ETF is unlikely, unless it’s a high-yield (junk) bond fund. If you’re willing to go that route, check out the iShares U.S. High Yield Bond Index ETF (CAD-Hedged), which trades as XHY-T. The year-to-date gain to Oct. 10 was 6.27 per cent. But be wary. This ETF has a history of volatility and the 10-year average annual compound rate of return is only 3.34 per cent.
As for REITs, there are several with yields above 5 per cent. But they carry a measure of risk that may go beyond what you are willing to accept.
Your safest move would be to invest in a GIC from a smaller institution. You won’t get 5 per cent, but Duca Credit Union was recently offering 4.25 per cent on a five-year term. Go to ratehub.ca for more information. – G.P.
Q – I own Enbridge (ENB-T) and BCE (BCE-T). I see they don’t earn enough income to cover their dividends. Consequently, there are no retained earnings, and the deficit continues to grow.
As investors, should we flee these situations? Or are these companies large enough to run deficits for several years with little consequences? – Geoff O., Ottawa
A – I wouldn’t flee these stocks (I own both), but I’d monitor them closely and take nothing for granted.
BCE currently yields 8.8 per cent, which is clearly a red flag. The company recently had its credit rating cut by Moody’s and the announced sale of its stake in Maple Leaf Sports and Entertainment to Rogers for $4.7-billion did nothing to boost the share price.
Third quarter results will be released Nov. 7. In the second quarter, BCE reported adjusted earnings per share of 78 cents, well below the quarterly dividend of 99.75 cents. The company guided to full year adjusted EPS of a decline of 2 per cent to a 7-per-cent drop below 2023.
But BCE doesn’t calculate its dividend payments on earnings. It uses free cash flow as its base, saying: “Free cash flow shows how much cash is available to pay dividends on common shares, repay debt, and reinvest in our company”.
Second quarter free cash flow was $1.097-billion. BCE has 912.3 million shares outstanding. On that basis, the total cost of dividends in the second quarter was $910-million. That’s 83 per cent of free cash flow. There’s not much wiggle room there and very little left over for debt reduction and reinvestment.
Enbridge pays a quarterly dividend of 91.5 cents or $3.66 a year, to yield 6.5 per cent. It’s Q2 adjusted earnings per share was 58 cents, again well below the payout.
Base business distributable cash flow was $2.798-billion. The company had weighted average common shares outstanding of 2.137-billion which works out to a total dividend cost of about $1.96-billion. That’s a better position than BCE, and Enbridge’s lower yield reflects that. But continue to keep a close eye on both situations. – G.P.
Q – Do you have any thoughts on Evertz Technologies (ET-T), a Canadian tech company with a 6 per cent-plus dividend? – John D.
A – The stock is cheaper than it was five years ago at this time, but it has looked a little stronger recently. The company specializes in producing hardware and software solutions for the telecommunications industry.
Recent financial numbers look good. The company reported record revenue of $514.6-million for 2024 fiscal year to April 30. That was up from 13 per cent from the prior year. Net income was $71-million (91 cents per diluted share), up 10 per cent from the year before.
The stock pays a dividend of 19.5 cents per quarter (78 cents a year), to yield 6.4 per cent. The company has a solid dividend history, including some special payments over the years.
Based on history, this stock offers good cash flow, but the capital gains potential is minimal despite a low p/e ratio of 14.51. – G.P.
Q – Just wondering if I can make any money by buying a rental property in Florida. I think prices will be very depressed as aa result of the recent hurricanes. – Gojko B.
A – Many Canadians have Florida properties, but some saw their homes destroyed by Hurricane Helene and Hurricane Milton and don’t plan to rebuild. So yes, prices should be depressed in the affected areas, at least for a while. But there are a lot of considerations for a Canadian thinking of owning a rental property in the state. Among them:
Can you get a mortgage? U.S. mortgage lending requirements are very strict, and some financial institutions will not lend to non-residents. Before you make an offer on any property, make sure you can arrange financing.
Are you prepared to file U.S. tax returns? Renting a Florida property means you’ll have to collect state sales tax and file a federal tax return, which for non-resident can be a hassle. My advice is to get an accountant who can handle all this for you – although of course that will add to the expense.
Who will manage the property? Also, can you find a 12-month renter, someone who will provide cash flow all year?
Consider the cost of insurance. They’re skyrocketing, especially for flood insurance (if you can get it).
Can you make a profit? Check out the rental rates on comparable units in the area you are considering. Do the math to determine if you can make a few dollars after all the expenses have been calculated.
Finally, can you deal with the anxiety that every Florida experiences when a new hurricane approaches? I lived with that for several years. It’s not fun! – G.P.
Q – Most of the articles I read are about building wealth. I’m suddenly at the other end of life and not sure how to manage my Canadian dividend portfolio.
I think my small ($65k) portfolio of 22 Canadian dividend stocks, is performing slightly better than the available dividend ETFs, with no management fee. The dividend distribution is certainly a little higher than the common ETFs, but it will not be enough to cover my expenses. So, at various future points I’ll be faced with decisions about which holding to sell.
What criteria should I use? How do I make those “sell” decisions?
Or – and I hate to take apart what I’ve built – should I sell it all and put the money into one or two ETFs and draw them down as needed? – Bill C.
A – I think you have too many positions for such a small portfolio. Based on your numbers, the average size of any given holding is less than $3,000. This means you probably spent more on commissions than necessary when building the portfolio, and it will cost you more when you sell. Fortunately, the fact it is outperforming likely offsets that.
The sell decisions should focus on retaining those stocks that are doing best, in terms of total returns. Don’t focus on yield alone. Keep the stocks that have given you the best combination of dividends and capital gains. The stocks at the top of the pyramid should be the last to go. – G.P.
If you have a money question for Gordon, send it to [email protected] and write Globe Question on the subject line. I can’t guarantee a personal response but I’ll reply to as many queries as possible in this space.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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