The recent declines in Canadian interest rates have been a wonderful thing for some, but others are seeing their guaranteed investment returns rapidly decline.

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A top-rate guaranteed investment certificate (GIC) today pays 4.05 per cent for one year locked in, 3.8 per cent for two years locked in and 3.55 per cent for three years locked in. I believe the best rate we locked in for a client was 5.74 per cent for two years back in October 2023. Even these rates in the range of 3.55 per cent to 4.05 per cent are going lower very soon and may go meaningfully lower.

If you want to earn income of six per cent or more on an investment portfolio, you will need to look somewhere other than GICs and money market funds.

These conversations become particularly important when someone sells a home and needs to turn the proceeds into monthly living expenses that might include monthly rental expenses for the first time in decades.

Sometimes, a client will come to us and say, “I am selling my home for $2 million and need to make the funds last and also fund my new rental condo/retirement home. How do I do it?”

With $2 million, you should be able to generate in the range of $100,000 a year if the focus is income while largely keeping capital protected. Keep in mind there will be years with better performance and years a little worse. Also remember that while capital gains should form a portion of returns, I am only focusing on income here.

Here is an overview of how we might achieve this today.

Stocks

Allocation: 40 per cent of the portfolio, with a current yield of six per cent.

Like all investments with income yields, the yield is only one piece of the decision to own a stock. Some of the names below are ones with high yields that we currently own: Bank of Nova Scotia: 5.71 per cent; Enbridge Inc.: 6.35 per cent; Rogers Sugar Inc.: 6.37 per cent; and BP PLC: 5.91 per cent.

These are not buy-and-hold forever names. As cycles and companies evolve, there will be changes at some of these companies, but, at the moment, these are some high-yielding stocks we would invest in to deliver income. Of course, if you really want to push the dividend boundary, you can include BCE Inc. stock, which is now yielding more than 10 per cent.

Structured notes

Allocation: 20 per cent, with a current yield of eight per cent to 10 per cent.

These notes are technically structured like a mutual fund, but have both bond-like and stock-like components. If you buy a conservative enough note, it will very likely pay a fixed monthly interest amount until it is redeemed at the purchase price. This could be in as short as six months, but many notes are for a minimum of at least one year or even two years. They can all be sold daily.

Current examples include: 8.04 per cent for a note tied to the Canadian bank index, which will pay this amount as long as the bank index is up, sideways or down, but not if it is down more than 30 per cent (this note will pay for a minimum of two years); 10.05 per cent for a U.S dollar note tied to U.S. banks; and 9.84 per cent for a note tied to the Canadian energy index, with a 30 per cent downside barrier.

Bonds

Allocation: 15 per cent with a current yield around 5.5 per cent.

Many bond yields are declining along with overall interest rates, but there are some investments that might be reasonable from a risk perspective and can deliver strong yields. Sometimes, you need to look a little outside the box to get there.

There are interesting investments within the limited recourse capital notes space. There are Canadian notes from the Big Five banks yielding 5.5 per cent to a likely call in three years. There are other notes that only yield about four per cent, but have a decent likelihood of getting called at $100 in two years and are trading at around $90 today.

Depending on the note, you can also use these strategically for either capital losses or for capital gains.

Preferred shares

Allocation: 15 per cent,  with a current yield between six per cent and 7.5 per cent

Preferred shares have become a little bit of a smaller market in Canada over the past couple of years, but opportunities still exist for high dividend income. Under the rate-reset type of preferred shares, current yields are around 7.5 per cent. This includes offerings from Enbridge, TransAlta Corp. and TC Energy Corp.

The rate-reset feature could mean a lower dividend yield at some set time period depending on the five-year Canadian bond yield at the time, but most of these shares will not reset for at least two years.

In the straight preferred group are shares that do not have a dividend-reset feature. One of our favourites is from George Weston Ltd., which currently trades at a 6.01 per cent dividend yield. We also believe the price of the shares will likely go higher as interest rates decline.

Mortgages, real estate and REITs

Allocation: 10 per cent, with a current yield of more than eight per cent.

A recent purchase in our funds is H&R Real Estate Investment Trust (REIT), which is paying a yield of 5.64 per cent. H&R is one of Canada’s larger REITs with a $3-billion market capitalization. It owns residential, industrial, office and retail properties in major Canadian cities and a few U.S. markets. Prior to COVID-19, the stock was trading at more than double its current price.

We are a little cautious on the Canadian mortgage space, but there are publicly traded mortgage investment corporations that pay high yields. Timbercreek Financial Corp. currently has a yield of 9.24 per cent, while Firm Capital Mortgage Investment Corp. pays 8.31 per cent.

In summary, this sample portfolio is currently generating an income of more than 6.6 per cent. Not only is this yield quite high, but some of the income is more tax-advantaged through the use of Canadian dividends or even capital gains.

Each person’s situation and needs are different and should be considered before focusing a portfolio on income, but it is nice to know that a scenario such as a house sale can likely be converted into capital that generates significant monthly income that can cover rent, retirement home expenses or other living needs.

Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio manager and financial planner at TriDelta Private Wealth, a boutique wealth management firm focusing on investment counselling and high-net-worth financial planning. You can contact him through www.tridelta.ca.

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