Stabilizing finances in turbulent times
(Special) - If the recession and global financial meltdown has taught any lesson, it surely must be that people need to build stability in their investment portfolios and personal finances if they're going to weather turbulent times like we've had and likely will continue to experience for a while yet.
Dr. Sherry Cooper, chief economist with the Bank of Montreal, believes the financial and economic crisis was unprecedented. "It was a balance-sheet recession, not a business-cycle recession," she says, predicting "there will be a continuing malaise and low interest rates for a while," probably into 2013.
In today's low interest-rate environment, one way investors can boost returns, minimize market volatility and build a stable, reliable source of income is through dividend-paying stocks.
Dividend yields on the TSX a couple of months ago were about 2.8 per cent, half a percentage point above the yield on 10-year government bonds and higher than most yields on fixed income securities such as GICs.
"You've got to go back 40 or 50 years to see a time when stock dividend yields were higher than 10-year government bonds," says Paul Taylor, chief investment officer of BMO Harris Private Banking. "Dividend- paying equities (in the health care, telecom, utilities and consumer staples industries in particular) fit well with this current environment and are a good strategy."
A screening of dividend stocks on the TSX as of Oct. 13, 2011 by BMO based on a yield of more than 2.5 per cent, a five-year dividend growth of 10 per cent, a payout ratio of less than 60 per cent, and a positive 10-year trend in pre-tax margin, ranked Canadian Oil Sands as the top performing dividend-paying equity with a dividend yield of 5.5 per cent, followed by Reitmans (5.3 per cent) Power Corp. (4.8), Transcontinental (4.6), Corus Entertainment (4.5), Royal Bank (4.4), Shaw (4.3), Telus (4.1), Rogers (3.9), TMX Group (3.8) and Finning (2.5).
Dividends are paid quarterly, and therefore provide a regular source of income. Many companies offer dividend reinvestment programs, which automatically reinvest the dividends in more stock, often at a reduced price.
Dividends also have the advantage that income derived from them is taxed at a lower rate than interest income.
People nearing, or in, retirement have a particular need to build a stable source of income and minimize the impact of market fluctuations on their portfolios and finances.
"If you're approaching retirement, chances are you've focused on saving, but now you face the challenge of turning hard-earned savings into income that will last your lifetime," says Sterling Rempel, a Certified Financial Planner with Future Values Estate and Financial Planning in Calgary.
This demographic group needs to protect savings against three main retirement risks.
The first is longevity - the risk that you might outlive your savings.
The second is market returns. If the market takes a downturn, you have only a short time to rebuild your savings.
And inflation risk - the risk that your retirement savings might not earn enough to keep up with inflation. This risk is greater in retirement because expenses can keep increasing while your income may not.
Products such as annuities, which offer a guaranteed minimum lifetime income benefit, are gaining popularity as an important retirement income planning tool.
A lifetime income benefit puts you in control of your retirement savings and income by guaranteeing your income for life. As long as you don't withdraw more than the guaranteed annual amount, your lifetime income amount will not decrease.
A lifetime income benefit can provide a predictable, guaranteed income for life starting as early as age 50, an income percentage that increases as you age, and a smooth transition from savings to income.
"A lifetime income benefit is most appropriate for people getting ready to retire and for retirees looking for secure, predictable, guaranteed income," says Rempel. "It works best for people who do not already have enough guaranteed income from government benefits, company pension plans or life annuities."
"To purchase a lifetime income benefit your normally must be between 50 and 90," Rempel adds. "A lifetime income benefit is just one component of a well-diversified retirement income portfolio."
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2012 Talbot Boggs
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