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 September it recommended 38 government bonds, 13 corporate bonds and 15 preferred shares to buy now.

Should I buy bonds or GICs now?

Two factors argue against investing heavily in Government of Canada (GOC) bonds at the present time. First, we are experiencing multi-generational—in fact, historic—lows in the interest rates paid on high-quality bonds. A five-year GOC bond, for example now yields 0.66 per cent. (Note that the rates for our recommended GOC bonds are somewhat lower as they reflect the impact of commissions and relatively low purchase amounts.)

GICs, on the other hand, offer a significant marginal increase in available current yields. As you can see in our tables, you can obtain 2.75 per cent on a five-year GIC from Oaken Financial, a difference of 275 basis points over a five-year GOC bond. If you’re not that concerned about liquidity, then, we think it’s a good idea to include GICs in your fixed-income portfolio now.

The second factor that argues against investing in GOC bonds now is that their yields may rise gradually over the next year or so, as the U.S. Fed raises its policy rates. But negative rates elsewhere should continue to exert some downward pressure on yields.

Should I buy preferred shares now?

In our opinion, fixed-income securities deserve a considerable weighting in the portfolios of investors who consider capital preservation as an important investment objective. Such investors usually count income, to a greater or lesser degree, as an important portfolio objective too.

But yields on today’s Government of Canada (GOC) bonds are low, as we point out above. One way you can increase your yield is to include more provincial issues among your government bonds. You can also hold more corporate than provincial exposure.

And you might also consider using preferred shares in place of some of your corporate exposure. If you do so, remember two things. The dividend tax credit is available to non-registered holdings, not holdings in RRSPs and the like. Second, though we continue to favour fixed-rate preferreds over floating-rate preferreds, the diminishing spread between the yields of these two types of securities, suggests you include some floaters in your portfolio as well.

 

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