Have you ever seen an old friend recently and been shocked to see how much they had changed over the years? After a quick conversation, you may have felt a little introspective about your own life and how much things had changed for you. You may be facing some of the same feelings if your focus has changed from saving to generating income for retirement.
Not long ago, you could rely on the stability of government bonds and Guaranteed Investment Certificates (GICs) to protect your savings while providing you with an attractive rate of return. But as interest rates change, so too does the amount of interest income that a GIC portfolio produces. Many investors today are taking advantage of diversified income mutual funds that focus on investing in a variety of income-oriented securities.
Here is an overview of the various types of asset classes that diversified income mutual funds invest in making an effort to produce a more reliable income stream.
Corporate bonds - Bonds issued by stable corporations that need working capital to invest in their business.
Because these bonds are issued by corporations, they are considered higher risk than government bonds,
since a government can always pay its debt by printing more money. To compensate investors for this
additional risk, the amount of interest that corporate bonds pay is almost always higher than government
bonds and GICs.
High-yield bonds — Bonds issued by less stable corporations. Because they are considered higher risk than government or investment-grade corporate bonds, the rate of interest they pay to compensate investors for this risk is almost always higher.
Emerging market bonds - Bonds issued by countries with developing economies and corporations that reside within these countries. Emerging market bonds have become more popular with investors in recent years largely because many of these economies have become stronger, which has led to higher credit ratings.
Preferred shares — Called “preferred” because these shareholders receive their dividends before common shareholders. Furthermore, in the event the company experiences financial hardship, preferred shareholders have the potential to be paid before common shareholders.
Dividend paying equities - Common shares that pay regular dividends to shareholders. While these cash payments are never guaranteed, companies that pay dividends tend to be large, financially secure corporations in mature industries. If you are looking for a tax-efficient source of income, dividend payments receive preferential tax treatment in Canada when compared to interest income from bonds and GICs.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd and an Investment Funds Advisor with Manulife Securities Investment Services Inc. The opinions are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd or Manulife Securities Investment Services Inc. Stuart can be reached at stuart@precisionwealth.ca.