Some people like the security of their principal and guaranteed returns from Guaranteed Investment Certificates (GICs), which are equivalent to Certificate of Deposits (CDs) in the U.S.
Currently, a five-year term results in an interest rate of about 3%. That’s roughly keeping pace with the long-term inflation rate. So, people are able to maintain their purchasing power that way.
Invest in the stock market
Investing in the stock market, investors can get markedly better returns. After all, the long-term average stock market returns are about 10% in the United States. The Canadian stock market tends to underperform due to the large exposure to the energy sector.
The simplest way would be to buy periodically in a market-wide fund, such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). For example, if you can save $200 every month for investing, you can invest $1,000 every five months to invest for the long run.
Invest in dividend stocks
For people who’re interested in investing, going with proven businesses that pay dividends is a great way to start. By buying these stocks when they’re relatively cheap, it’s entirely possible to get returns of more than 10% per year in the long haul.
The Big 3 Canadian banks are proven businesses with stable growth. Among the three, both Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) are trading at modest discounts. According to the analyst consensus from Thomson Reuters, both stocks have 12-month upside potential of more than 11%.
Additionally, they offer decent yields of almost 4% and 4.9%, respectively. So, their dividends already beat returns from GICs or CDs. Undervalued shares, a decent dividend, and stable growth of 6-7% for the banks should deliver long-term returns of more than 10%.
If an investor is planning to put their money in a GIC or CD for five years, they might as well consider buying shares in TD or Scotiabank stock for higher returns. Just be ready for some volatility in the stocks.
If you bought $10,000 in TD stock around the current multiple of about 11.2 in 2012, it would have turned into $23,111 for annualized returns of 12.2%. If you bought $10,000 in Scotia stock around its current multiple of 10 in 2016, it would have turned into $14,262 for annualized returns of 11.4%.
By investing in stocks, you’ll be taking on entirely different risks than stashing money in GICs or CDs. You’re taking on the risks of the underlying businesses — if they do well, the respective stocks will likely do well. You also need to be responsible for buying the stocks when they’re trading at good valuations.
It’s best to have a long-term mindset for investing, as the stock market tends to go up over the long run. In the case of a crisis, and stocks plummet, it could take a year or two for stocks with great businesses to recover.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we’re long TD and BNS.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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