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%.
Depending on your investing strategy, you might take (partial) profit off from a holding that has become excessively overvalued or choose to hold on to them as a part of your portfolio for safe income.
However, certainly, when stocks have become pricey as Realty Income (NYSE:O) and Welltower (NYSE:WELL) have, it doesn’t make sense to buy shares, as they’ll likely deliver lackluster returns in the near term. Instead, wait until their valuations have returned to more reasonable levels for a bigger margin of safety and a higher initial yield.
Investors often buy blue-chip REITs for their above-average and generally safe dividends. It’s difficult to say goodbye or even take partial profits from SWAN (sleep well at night) REITs when they have done well.
It’s wonderful if you bought them at a low price when they’re undervalued. But what do you do when they have run up and become excessively overvalued?
The U.S. market has been led by the bull for pretty much 10 consecutive years. So, it’s better to take a more defensive stance to prepare for attacks from the bear. A core component of a defensive portfolio is it can utilize conservative dividend stocks as its foundation.
Here are some tips for choosing your foundation conservative dividend stocks.
Earnings or Cash Flow Stability
Healthy dividends are paid from earnings or cash flow. So, stable earnings or cash flow generation improve the dividend safety of a stock.
Typically, utilities, REITs, the big Canadian banks, the big Canadian telecoms, and energy infrastructure stocks are good places to search for businesses that generate stable earnings or cash flow.
When checking for dividend safety, the first 2 things to look at are the payout ratio and dividend track record of the company. Typically, the lower the payout ratio, the safer the dividend.
However, certain industries like REITs and utilities tend to have higher payout ratios. So, it’s best to compare a company’s payout ratio to that of its industry peers.