Best bonds and preferred shares to buy now

Every month the Money Reporter, the newsletter for investors whose interest is more interest,  publishes its list of recommended bonds and preferred shares. In July it recommended 38 government bonds, 13 corporate bonds and 15 preferred shares to buy now.

What to do with bonds now

Yields on bonds remain very low by historical standards, especially in light of inflation. But we have to balance those low though fairly safe returns with the risk of stock market volatility. Global economic headwinds leave stock markets vulnerable to any negative developments.

That is why we continue to recommend that investors with an average risk tolerance maintain a 37-per-cent weighting in fixed income right now, split 55 per cent in corporate bonds and 45 per cent in government bonds.

To obtain an acceptable average yield from fixed-income securities these days, however, you may want to construct a portfolio that includes a generous portion of GICs. With these securities you give up liquidity, of course. But if you plan your future cash needs carefully that needn’t necessarily matter. Right now, you can get a yield of 2.75 per cent on GICs with terms to maturity of two to five years at Oaken Financial. This is a better rate than you’ll find on most bonds with similar maturities.

What to do with preferred shares now

With a current recommendation of a 37-per-cent allocation to fixed income, and 55 per cent of that in corporates, it is worth considering using some preferred shares to boost the yield on the latter portion of this allocation.
Additional measures to improve your average yield include using more Canadian provincial bonds than usual for the government portion, and making corporate bonds the longest of your maturities in the bond allocation.

If you opt for some preferred stocks, they can be held outside of a registered plan, such as an RRSP, if you have capital there, to take advantage of the dividend tax credit. Otherwise you can use registered plans, since you can defer taxes and boost the income on the fixed-income portion of your plan.

For preferreds, we recommend holding a mix of straight preferreds and floating-rate preferreds. The average yield on our straight fixed preferreds is now 5.31 per cent, while the average yield on our floaters is 4.36 per cent, a difference of just 95 basis points.

 

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846