High interest ETFs, quality dividend stocks, dealing with too much income and more investing …

Happy July! Let’s celebrate by checking out the mailbox to see what questions readers have sent.

High interest ETFs

Q – What do you think of High Interest Savings Account (HISA) ETFs in the current investment environment? Any suggestions about where to get the best rates? – Dale Y.

A – These ETFs have become very popular with investors recently, with $3.8-billion in new money pouring in during the first four months of the year, according to National Bank Financial.

HISA ETFs typically pay higher rates of return than savings accounts or money market funds, because of the negotiating power of their sponsors due to the large cash inflows.

Several companies offer them. One of the best-known is the CI High Interest Savings ETF (CSAV-T), which trades in a tiny range of $50.00-$50.10. It closed on June 30 at $50.06. The payout varies from one month to the next. The trailing 12-month total is $2.094, which would work out to a yield of 4.2 per cent at the current price. But recent payments are much higher than those of a year ago because of the interest rate increases we have seen. The June monthly payout was $0.214 which would imply a forward yield of 5.1 per cent.

As for which fund has the best rates, that will vary from month to month. Find one you’re comfortable with and stay with it. Remember, if rates start to pull back, so will the distributions from these ETFs.

Two things you should know. First, the Office of the Superintendent of Financial Institutions (OSFI) has launched a review into the liquidity requirements for these funds. In other words, do they have enough cash to meet the demands of a sudden sell-off – the ETF equivalent of a run on the bank?

Second, some financial institutions limit the sale of these funds to their own products. Ask your broker about which ones are available to you. – G.P.

Stock for daughter’s TFSA

Q – My daughter is 18 and just opened a TFSA. Her investment time horizon is very long. There are a lot of good stocks to consider (Google, Microsoft, Amazon, etc.), but I wonder if you can suggest something better with a dividend. – Carolina A.

A – We have many high-quality dividend stocks on the recommended list of my newsletters. Given your daughter’s age and lack of investment experience, I’d suggest a well-established company with some growth potential and a history of regular dividend increases.

Canadian National Railway Co. (CNR-T) fits the bill. We originally recommended it in my Internet Wealth Builder newsletter in 2002 at $12.98. Twenty-one years later, it’s trading at $160.42, for a gain of 1,135 per cent, not including dividends. The yield is low, but CN has a history of increasing the payout each year, sometimes by a significant amount. The increase this year was almost 8 per cent. The downside risk is small, although if there is a recession expect a temporary retreat in the share price. Long-term, however, this would be an excellent investment for her. – G.P.

Variable-income securities

Q – I have read the pages in your TFSA book about how to invest based on percentages and types of investments at certain ages. There is a whole section called Variable Investments which my Manulife Investment Manager has not included in the “Buy and Hold” portfolio he has us in. Is that something we should be concerned about?

My husband just turned 65 and has been diagnosed with an aggressive type of cancer. Should we just get out of the market altogether right now?

Are those types of investments just not relevant in this unstable market especially going into the next couple of months? Thank you so much. – Valerie Q., Barrie ON

A – First, let me extend my best wishes to your husband. As a cancer survivor, I have some idea of what he is going through. I hope the treatments work.

As to your question, let’s start with variable income securities. In my TFSA book, I define them as assets that do not pay a predictable yield. These might include exchange-traded funds (ETFs), mutual funds, floating rate preferred shares, etc. Stocks that have a history of dividend volatility (some oil producers for example) also qualify.

This is only an important consideration if you need steady, predictable cash flow from your securities. If not, don’t be concerned that there is no separate category in your portfolio.

Your other question is more basic: Should you get out of the market in the light of your husband’s condition?

There are several factors to consider. First, what is the long-term approach? Presumably, if he passes, you will still want the money invested somewhere. You need to decide where that will be. GICs offer more safety and a reasonable rate of return at this time but tie up your money until maturity. The stock market offers more long-term growth potential but short-term risk. The extent of that risk depends on what you own.

Then there are taxes to consider. If you sell your current portfolio, how much will you end up owing the CRA? Is that a cost you want to be saddled with at this time? And while we’re discussing taxes, who owns the accounts? Are they registered, non-registered, or a mix? All this will make a significant difference if your husband dies.

I suggest you discuss these issues with your Manulife advisor. He is in the best position to guide you. – G.P.

Wants an ETF with more volume

Q – I am a long-time reader and follower of yours and I want to tell you how much I enjoy your Canadian content on investing.

You discussed the iShares Core S&P U.S. Total Market ETF (XUU-T) recently. I have not invested in it because I find the daily volume is too low. Do you follow a similar ETF that trades on the TSX with a higher daily volume? Thanks for your time. – Pat H., Renfrew ON

A – XUU has an average daily volume of 17,887. That’s low but not unreasonable. For more trading activity, look at the Vanguard U.S. Total Market Index ETF which trades on the TSX under the symbol VUN. Its mandate is much the same as that of XUU and the average daily volume is 45,225. This version of the fund is unhedged (there is also a hedged version).

However, VUN has a management expense ratio (MER) of 0.17 per cent, compared to 0.08 per cent for XUU. That contributes to slightly higher returns for the iShares entry. Over the five years to May 31, it averaged 10.71 per cent annually compared to 10.57 per cent for VUN. Not a lot, but over time it can add up.

So, take your pick. More volume or a somewhat better return. – G.P.

Too much income

Q – Following the death of my husband in 2005, I invested for income in a non-registered account with Phillips, Hager & North … most of it in mutual funds. Since then, I have come to regret my decision because of the distributions associated with the portfolio.

I live modestly and withdraw the minimum from my RRIF. My income would be well below the clawback level of $87,000 per year except that I must declare capital gains distributions and dividends (T3 and T5 slips). This means I must pay more in taxes.

My question is this. Do ETF’s (which have a much lower MER) have the same distributions? I am seriously considering whether it makes sense to withdraw all my money from PHN and invest it instead in ETFs. My total returns are in the area of 5 per cent…not stellar.  It does mean that I have a capital gain in total of $300,000+, half of which is taxable. It would cost me a lot in taxes but may be worth it going forward. I would appreciate your comments. – Frances B.

A – Let me get this straight. You invested for income but now you feel you have too much of it? There are a lot of people in Canada who would like that problem! But let’s see what we can suggest.

Like mutual funds, most ETFs pay distributions. The amount varies from one ETF to another, as with mutual funds. I would expect if you invested in ETFs that are similar to the PHN funds you now own, you’d receive similar distributions. You’d be taking a big tax hit and end up no farther ahead.

I suggest you talk to a financial advisor at PHN, explain your concern, and ask for advice. For example, you have not mentioned Tax-Free Savings Accounts. It may be possible to move some money each year into a TFSA at a minimal tax rate. Here’s how:

When you sell mutual fund units in a non-registered account, any capital gain is taxable. If some of your funds have a small capital gain that would attract little tax, you could start your selling plan with those. If you have some bond funds, they may even be showing a loss, depending on when you acquired them. If so, selling them will generate a capital loss, which can be used to offset gains.

The financial advisor can be more specific, as he/she will have access to all the facts. Please do not incur huge capital gains by selling everything at once. – G.P.

If you have a money question, send if to gordonpape@hotmail.com and write Globe Question on the subject line. I cannot guarantee a personal response but I’ll answer as many questions as possible in this space.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

Source link