It’s time to start thinking about applying the most basic rule of stock investing to bonds: buy low.
Bond prices have plunged this year, which means yields have risen sharply. We are now entering a yield zone where investors with a long-term view can find interesting developments, particularly in corporate bonds.
The return of the FTSE Canada All Corporate Bond Index was around 4.8% at the end of June. An exchange-traded fund holding corporate bonds is expected to offer an after-fee return of 4.3-4.6% these days.
You’ll fall short of the 5% return you can now get in GICs with these ETFs, but there are offsetting benefits. Bond ETFs have the liquidity of a stock, while GICs are locked in unless cashable and therefore have a lower interest rate. Bond ETFs also offer the potential for capital gains when interest rates fall.
Individual investment-grade corporate bonds — typically BBB and above — can give you returns of 4-5% for terms as short as two years.
Example: A BBB-rated Home Trust Co. bond maturing June 13, 2024 had a yield of 5.1% at the end of June.
If you’re willing to hold out for four to five years, there are options like a BBB high-rated H&R REIT bond maturing June 2, 2026, offering a 5% yield.
For the past 20 years or so, a 5% return on a bond or GIC has been the impossible dream of conservative investors. So what about locking in a return of 5% or more for the next 20 years or more?
That’s possible, considering Bell Canada’s bonds maturing on December 18, 2045 and yielding 5.6% at the end of June. A Metro Inc. bond maturing on December 4, 2047 offered a yield of 5.5%.
The price of long-term bonds like these would likely fall if interest rates continue to rise, as is generally expected. One option is to keep an eye on these bonds and wait for even higher returns. Again, 5% has proven to be a return rarely available for an investment grade bond over the past two decades. If inflation wears itself out over the next year, it may do the same again.
— Rob Carrick, personal finance columnist
Also see: In a turbulent global economy, Ian Brown sets out to seek answers in the bond markets
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actions to ponder
Food Couche-Tard Inc. (ATD-T) Shares of Quebec convenience store operator Circle K, Couche-Tard and Ingo in Canada, the US and Europe have outperformed the S&P/TSX Composite Index this year. But most investors probably aren’t celebrating. After the share price essentially doubled in the four years from May 2018 to May 2022, following a succession of deals that increased the company’s store count by 40%, shares have fallen 18% since mid-May. The stock is now trading at levels seen last July. David Berman examines why this may be a buying opportunity.
Trans Alta Corp. (TA-T) Last quarter, the utility’s stock price rose 14%, making it the best performing stock in the S&P/TSX Utilities Index. Earnings expectations remained relatively stable. Meanwhile, the stock has nine buy recommendations and two neutral recommendations with a one-year expected price return of almost 12%. Jennifer Dowty takes a look at the latest investment case.
What a $6 Billion Scotiabank Fund Manager Buys and Sells
There are two types of bear markets, notes fund manager Vishal Patel – those that accompany a recession and those that circumvent it. Although he’s not betting on the one we’re in right now, Mr Patel thinks the market downturn is a good time for longer-term investors to make some money. Brenda Bouw reached out to the Scotiabank fund manager to see what he’s been buying and selling lately.
Why are strategists still so positive, despite all the bad news
Wall Street forecasters are still remarkably optimistic despite falling stock prices and recession forecasts that have become as common as long weekend hot dogs. On average, top strategists predict that the S&P 500 will end 2022 at 4,482. If these strategists are correct, US stocks are poised to jump 18% above their closing level last week. It would be surprising to say the least. For one thing, the S&P has had its worst first half since 1970 in the past six months. On the other hand, stock market gains of the magnitude that strategists predict simply don’t happen that often. Ian McGugan explains.
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Some of Canada’s largest banks prevent online investors from buying high-interest exchange-traded funds, which compete with banks’ lucrative deposit accounts. Clare O’Hara tells us more.
Do banking stocks reflect a recession? Not yet, and that’s a concern
Canadian bank stocks are struggling as investors worry about the possibility of a looming recession, but some analysts say the banks are not yet reflecting a nasty economic downturn. Should investors stay clear at this point? David Berman shares some thoughts.
Why Canadian energy stocks are a no-brainer
Over the past few weeks, the energy sector has been hit hard as fears of a global recession sent crude oil prices falling off their steady upward trajectory since the start of the year. Global oil benchmarks, however, are still comfortably above US$100 a barrel, where they are most likely to hold for the foreseeable future. This commodity backdrop equates to huge profits for Canadian energy producers, which are suddenly put up for sale to those still willing to invest in fossil fuels. Tim Shufelt examines why now may be the perfect time to stock up on Canadian energy stocks.
Markets fall, but my dividends keep rising
Some people celebrate Canada Day by wearing red and white or going to watch the fireworks. John Heinzl, however, likes to express his patriotism by adding up all the dividend increases of Canadian companies in his Yield Hog Dividend Growth Portfolio model. As he explains here, his dividend growth stocks haven’t let him down.
How a SPAC deal can go horribly wrong
Have you ever written a blank check or made a purchase without knowing what you just bought? The answer is probably ‘no’, unless you’ve been to a SPAC or two. In recent years, SPACs, or special purpose acquisition companies, have been all the rage and investors can’t get enough of them. That is, until recently. And this look at Electric Last Mile Solutions by Philip MacKellar of The Contra Guys is an example of things going very wrong in the SPAC space.
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Ask Globe Investor
Question: I plan to retire in 2025. However, it could be earlier. I have funds in GICs in a non-registered account. I have no room in my TFSA. Can you recommend a tax-efficient or tax-deferred ETF or mutual fund? I am looking for an investment to produce a monthly income. At first, I will reinvest the monthly income, but I will expect to take it monthly when I retire. – A M
Answer: Take a look at the BMO Canadian Banks Covered Call ETF (ZWB-T). Depending on your goals, it seems to be well suited for your needs. It invests in the top six banks, so the level of risk is relatively low. Managers use covered call writing to improve cash flow. Currently, the fund pays $0.11 per month ($1.32 per year), which equates to a return of just over 7% based on recent price. Most distributions are received as eligible dividends or return of capital, so the fund is very tax efficient. The ETF was launched in 2011 and has a ten-year average annual compound rate of return of 10.4%. The management expense ratio is 0.71%.
What’s up in the coming days
Financial adviser John De Goey has some sharp words for investors who call it a “stock-picking market.” And Gordon Pape will have some small cap energy picks on the TSX.
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Compiled by Globe Investor staff