Unlocking a 6% Income Strategy in a Downward Trend of Interest Rates

In recent months, the Canadian financial landscape has experienced a decline in interest rates, which, while beneficial for some borrowers, poses a challenge for investors seeking reliable income. As traditional savings vehicles like Guaranteed Investment Certificates (GICs) and money market funds struggle to provide adequate returns, those focused on maximizing income must look beyond these options.

Currently, top GIC rates sit at 4.05% for a one-year term, 3.8% for two years, and 3.55% for three years. Interestingly, just back in October 2023, we secured a remarkable rate of 5.74% for a two-year GIC—indicative of how rapidly the investment landscape can shift. As rates trend lower, finding a consistent 6% return or more requires strategic investment decisions that diversify income sources.

Where to Find That 6% Yield?

For those considering selling a high-value asset, such as a home, the importance of a solid income strategy becomes paramount. Imagine selling your home for $2 million and needing that capital to fund new living arrangements. The objective? To generate an annual income of about $100,000, all while largely protecting the original capital.

Here’s a potential allocation that could help achieve that goal:

1. Stocks (40% of portfolio): Yielding around 6%.

Consider investing in high-dividend stocks. Current standouts include Bank of Nova Scotia (5.71%), Enbridge Inc. (6.35%), and BP PLC (5.91%). If you're willing to take on some volatility for greater yield, BCE Inc. offers returns exceeding 10%.

2. Structured Notes (20% of portfolio): Yielding approximately 8% to 10%.

These instruments combine elements of stocks and bonds with guaranteed returns, often paying fixed interest monthly. Examples include notes tied to Canadian banks and energy sectors, which provide a safety net against significant market declines.

3. Bonds (15% of portfolio): Current yields around 5.5%.

Diving into niche areas like limited recourse capital notes from leading Canadian banks can yield competitive returns, balancing risk and income potential.

4. Preferred Shares (15% of portfolio): Yields ranging from 6% to 7.5%.

High-dividend investments exist in this sector, such as offerings from Enbridge and TC Energy, providing stability amidst fluctuating market conditions.

5. Mortgages, Real Estate, and REITs (10% of portfolio): Yielding over 8%.

Investment in real estate through a solid REIT like H&R, alongside mortgage investment corporations like Timbercreek Financial, can provide significant yields while accessing the real estate market.

With this suggested diversified portfolio, an investor could generate an impressive income exceeding 6.6%, harnessing tax-advantaged Canadian dividends and potential capital gains.

As different financial circumstances arise—such as selling a home—it is crucial to tailor investment strategies to meet individual needs. This adaptability can help transform a one-time windfall into a sustainable income stream that accommodates living expenses, whether it’s for rent or retirement living.

In the ever-evolving world of finance, staying informed and flexible is key, ensuring that your financial goals can be met even in the face of declining interest rates. It’s not just about the returns; it’s about making your money work efficiently for you!

Author Information

Ted Rechtshaffen, MBA, CFP, CIM, is the president and portfolio manager at TriDelta Private Wealth, specializing in custom financial planning and wealth management. For more insights, visit www.tridelta.ca.

Don't miss out on more financial strategies – subscribe to our newsletter and stay ahead in the world of investments!