By Rick Singh
Have you ever bumped into an old friend and been shocked to see how much they had changed over the years? After a quick conversation, you may have felt a little introspective about your own life and how much things had changed for you.
You may be facing some of the same feelings if your focus has changed from saving to generating income for retirement. Not long ago you could rely on the stability of government bonds and guaranteed investment certificates (GICs) to protect your savings while providing you with an attractive rate of return. But as interest rates change so too does the amount of interest income that a GIC portfolio produces. With current low interest rates, payout rates are also low.
Traditionally safe investments may no longer provide enough interest income to meet your needs. GICs and bonds still play a role within a portfolio since they guarantee your principal investment and a rate of interest. However if you are looking for higher total returns, you will need to consider diversifying across a range of income-oriented investments.
To better diversify their retirement income portfolios, many investors today are taking advantage of mutual funds’ or Guarantee Investment funds (GIF) that focus on investing in a variety of income-oriented securities. Many fixed income mutual funds invest in various asset classes including investment-grade corporate, high yield bonds that have different risk profiles and varying levels of upside return potential. Income can also be generated through equities, primarily by investing in companies that have a proven track record of paying out dividends to shareholders.
Here is an overview of some types of diversified portfolios of mutual funds or Guaranteed Investment funds (GIF) that you can use in your portfolio in an effort to produce a more reliable income stream.
Corporate bond funds invest primarily in bonds issued by stable corporations that need working capital to invest in their business. Because these bonds are issued by corporations, they are considered higher risk than government bonds, since a government can always pay its debt by printing more money or raising taxes. To compensate investors for this additional risk, the amount of interest that corporate bonds pay is almost always higher than government bonds and GICs.
Dividend and equity income funds invest primarily in common shares that pay regular dividends to shareholders. While these cash payments are never guaranteed, companies that pay dividends tend to be large, financially secure corporations in mature industries, such as the banks. If you are looking for a tax efficient source of income, dividend payments receive preferential tax treatment in Canada when compared to interest income from bonds and GICs. Mutual funds that provide access to broadly diversified portfolios of dividend-paying companies are an excellent way to invest in these equity securities without taking on undue risk.
Diversified income funds invest in a broad range of income producing assets classes that may include the types of securities mentioned above. Diversified income funds benefit from active portfolio management since the various income producing asset classes can perform differently under given market conditions. By investing in a broadly diversified portfolio of income-producing securities, you have the potential to obtain higher total returns than with bonds and GICs without having to put all your eggs in one basket. One such investment that has been consistent for generating income and protecting the assets for my clients is the Manulife Monthly High Income fund, managed by Alan Wicks.
YTD Return- 15.01% (as of Dec. 31, 2013)
– Returning 15.01% calendar year 2013; top in its category
– The current asset mix is roughly 66% equity, 23% fixed income & 11% cash
– 31% in Canadian equities and 28% in US equities
– The Fund is rated 5-Stars on Morningstar
– Fund performance is top decile over 1, 3 and 10 year periods and top quartile over the last 5 years
Investing for income in today’s markets can be a difficult task. Are you ready to adapt to these changing times by considering new sources of income? Mutual funds or (GIF) can be an effective way to help diversify your retirement income portfolio. Be sure to discuss the risk and return characteristics of income-oriented mutual funds with your advisor. If you would like a copy of my recommended list of diversified income portfolios please contact Rick at 604-535-3367 or email: firstname.lastname@example.org . You can also find us on our website at www.crsfinancial.ca