A RRIF portfolio that might just make some money
Gordon Pape's recent recommended RRIF investments could be of use to folks looking to
build a conservative $50k portfolio.
-----------------------------------------------------------------------------------------------
Gordon Pape
Globe and Mail
Mar 06, 2013
RRIFs have to generate cash flow. The government insists that you take out a minimum amount of money each year so a plan has to be structured in such a way as to produce income.
But RRIFs (registered retirement income funds) must also be low-risk. Increasingly, Canadians are depending on them to provide a significant portion of their retirement income. These people cannot afford to sustain heavy losses in the later stages of their life.
Therein lies the problem. With interest rates so low, it's impossible to set up a low-risk RRIF that will produce enough income to meet Ottawa's minimum withdrawal requirements. A 71-year-old must take out 7.38 per cent of the plan's value as of Jan. 1. By 80, that rises to 8.75 per cent. An investor would have to take a considerable amount of risk to produce cash flow returns of that magnitude – a level that is inconsistent with the need to preserve capital.
Seniors' organizations have repeatedly asked the federal government to reduce the minimum withdrawal requirements to more realistic levels. Until now, such appeals have fallen on deaf ears.
So what should RRIF investors do? I suggest the best course is to balance the twin requirements of income and safety. Put a significant portion of the assets into low-risk securities in order to protect capital in the event of a stock market downturn. Invest the balance in medium-risk, higher yielding securities. There is no guarantee that this approach will generate a high enough total return to offset the minimum withdrawal requirement, but it should keep capital encroachment to a minimum.
Here are the components I suggested for a model RRIF Portfolio in my Income Investor newsletter. Prices are as of mid-February.
MAXA Financial three-year GIC
You've probably never heard of MAXA Financial. It's an on-line subsidiary of Manitoba's Westoba Credit Union and it offers some of the highest GIC rates in Canada. The reason I selected this one is that it pays interest annually as opposed to most GICs which pay only at maturity. It's also redeemable although there is a 12-month interest penalty if you cash in before maturity. The recent rate for a three-year term was 2.45 per cent and the minimum deposit is $500. Your money is guaranteed by the Deposit Guarantee Corporation of Manitoba however it should be noted that this is not a government agency and does not have the same resources as the Canada Deposit Investment Corporation. That's the price you pay for a higher yield. For more information go to www.maxafinancial.com. We will allocate 25 per cent of our portfolio to this GIC.
Phillips, Hager & North Total Return Bond Fund D units (PHN340)
This low-cost fund is one of the best ways to invest in a diversified bond portfolio with top-notch management. There's more risk here than in a GIC but the long-term return potential is much better as well. Bond markets are going to be under pressure for a while as interest rates creep higher but history has shown that the fixed-income team at PH&N can handle such situations better than most. Distributions are paid quarterly. The return for the year to Jan. 31 was 2.68 per cent. Recent NAV: $11.60. The minimum investment is $5,000. Weighting: 15 per cent.
CI Signature Dividend Fund (CIG610)
This fund offers a portfolio that includes a large holding of preferred shares (34 per cent as of Jan. 31) plus a mix of Canadian and foreign blue-chip dividend-paying stocks. It has better than average volatility (a measure of risk) and a good performance record. The one-year return to Jan. 31 was 10.85 per cent. Distributions are paid monthly at the rate of $0.04 per unit ($0.44 a year) which works out to a yield of 3.43 per cent based on the recent net asset value of $12.84. Minimum initial investment: $500. Weighting: 15 per cent.
CI Signature High Income Fund (CIG686)
We're moving higher on the risk scale with this one, but we're not getting silly. This is still a low volatility fund for its type. The portfolio is almost equally divided between bonds and stocks with about 10 per cent in cash and there is significant foreign exposure to add geographic diversification. Performance is above average for the category for all time frames from one to 15 years. The latest one-year total return was 12.04 per cent. Monthly distributions are $0.07 per unit ($0.84 a year) for a yield of 6.53 per cent based on a NAV of $14.40. Minimum initial investment: $500. Weighting: 15 per cent.
BCE Inc. (TSX, NYSE: BCE)
BCE recently announced a 2.6 per cent dividend increase, bringing it to $2.33 a year. That works out to a yield of 5.23 per cent based on the Feb. 15 closing price of $44.53. BCE is a solid blue-chip stock however it is not immune to a market pull-back. Weighting: 10 per cent.
Inter Pipeline LP (TSX: IPL.UN, OTC: IPPUF)
This limited partnership has been a great performer for over several years. The distribution has been increased four times since 2009 and is now $0.0925 a month ($1.11 annually) to yield 4.83 per cent based on a share price of $22.98. Weighting: 10 per cent.
Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP)
Here's another limited partnership that has been a tower of strength. It was first recommended in my newsletter in September 2010 at $18.90 and has since more than doubled in value to the recent price of $39.80. The distribution has been increased four times since then and at $0.43 (U.S.) quarterly is now 56 per cent higher than at the time of the original recommendation. Yield: 4.32 per cent. Weighting: 10 per cent.
Here is a summary of the portfolio using prices as of Feb. 15. Commissions are not taken into account and the U.S. and Canadian dollars are treated as being at par. Shares have been rounded up or down to the nearest five. The initial portfolio value is $49,910.30.
Security Weight/% Price Shares Yield/%
MAXA GIC 25 $12,500 125 2.45
PHN340 15 $11.60 645 3.28
CIG610 15 $12.84 585 3.43
CIG686 15 $14.40 520 6.53
BCE 10 $44.53 110 5.23
IPL.UN 10 $22.98 220 4.83
BIP.UN 10 $39.80 125 4.32
Totals 100 3.73
Overall, the portfolio should produce a cash flow yield of 3.73 per cent in the next 12 months. Obviously, that won't be enough to meet the RRIF minimum withdrawal requirement but hopefully the growth potential on the equity side of the portfolio will make up most or all of the difference. I'll review the portfolio again in six months to see how it is performing.
Gordon Pape's recent recommended RRIF investments could be of use to folks looking to
build a conservative $50k portfolio.
-----------------------------------------------------------------------------------------------
Gordon Pape
Globe and Mail
Mar 06, 2013
RRIFs have to generate cash flow. The government insists that you take out a minimum amount of money each year so a plan has to be structured in such a way as to produce income.
But RRIFs (registered retirement income funds) must also be low-risk. Increasingly, Canadians are depending on them to provide a significant portion of their retirement income. These people cannot afford to sustain heavy losses in the later stages of their life.
Therein lies the problem. With interest rates so low, it's impossible to set up a low-risk RRIF that will produce enough income to meet Ottawa's minimum withdrawal requirements. A 71-year-old must take out 7.38 per cent of the plan's value as of Jan. 1. By 80, that rises to 8.75 per cent. An investor would have to take a considerable amount of risk to produce cash flow returns of that magnitude – a level that is inconsistent with the need to preserve capital.
Seniors' organizations have repeatedly asked the federal government to reduce the minimum withdrawal requirements to more realistic levels. Until now, such appeals have fallen on deaf ears.
So what should RRIF investors do? I suggest the best course is to balance the twin requirements of income and safety. Put a significant portion of the assets into low-risk securities in order to protect capital in the event of a stock market downturn. Invest the balance in medium-risk, higher yielding securities. There is no guarantee that this approach will generate a high enough total return to offset the minimum withdrawal requirement, but it should keep capital encroachment to a minimum.
Here are the components I suggested for a model RRIF Portfolio in my Income Investor newsletter. Prices are as of mid-February.
MAXA Financial three-year GIC
You've probably never heard of MAXA Financial. It's an on-line subsidiary of Manitoba's Westoba Credit Union and it offers some of the highest GIC rates in Canada. The reason I selected this one is that it pays interest annually as opposed to most GICs which pay only at maturity. It's also redeemable although there is a 12-month interest penalty if you cash in before maturity. The recent rate for a three-year term was 2.45 per cent and the minimum deposit is $500. Your money is guaranteed by the Deposit Guarantee Corporation of Manitoba however it should be noted that this is not a government agency and does not have the same resources as the Canada Deposit Investment Corporation. That's the price you pay for a higher yield. For more information go to www.maxafinancial.com. We will allocate 25 per cent of our portfolio to this GIC.
Phillips, Hager & North Total Return Bond Fund D units (PHN340)
This low-cost fund is one of the best ways to invest in a diversified bond portfolio with top-notch management. There's more risk here than in a GIC but the long-term return potential is much better as well. Bond markets are going to be under pressure for a while as interest rates creep higher but history has shown that the fixed-income team at PH&N can handle such situations better than most. Distributions are paid quarterly. The return for the year to Jan. 31 was 2.68 per cent. Recent NAV: $11.60. The minimum investment is $5,000. Weighting: 15 per cent.
CI Signature Dividend Fund (CIG610)
This fund offers a portfolio that includes a large holding of preferred shares (34 per cent as of Jan. 31) plus a mix of Canadian and foreign blue-chip dividend-paying stocks. It has better than average volatility (a measure of risk) and a good performance record. The one-year return to Jan. 31 was 10.85 per cent. Distributions are paid monthly at the rate of $0.04 per unit ($0.44 a year) which works out to a yield of 3.43 per cent based on the recent net asset value of $12.84. Minimum initial investment: $500. Weighting: 15 per cent.
CI Signature High Income Fund (CIG686)
We're moving higher on the risk scale with this one, but we're not getting silly. This is still a low volatility fund for its type. The portfolio is almost equally divided between bonds and stocks with about 10 per cent in cash and there is significant foreign exposure to add geographic diversification. Performance is above average for the category for all time frames from one to 15 years. The latest one-year total return was 12.04 per cent. Monthly distributions are $0.07 per unit ($0.84 a year) for a yield of 6.53 per cent based on a NAV of $14.40. Minimum initial investment: $500. Weighting: 15 per cent.
BCE Inc. (TSX, NYSE: BCE)
BCE recently announced a 2.6 per cent dividend increase, bringing it to $2.33 a year. That works out to a yield of 5.23 per cent based on the Feb. 15 closing price of $44.53. BCE is a solid blue-chip stock however it is not immune to a market pull-back. Weighting: 10 per cent.
Inter Pipeline LP (TSX: IPL.UN, OTC: IPPUF)
This limited partnership has been a great performer for over several years. The distribution has been increased four times since 2009 and is now $0.0925 a month ($1.11 annually) to yield 4.83 per cent based on a share price of $22.98. Weighting: 10 per cent.
Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP)
Here's another limited partnership that has been a tower of strength. It was first recommended in my newsletter in September 2010 at $18.90 and has since more than doubled in value to the recent price of $39.80. The distribution has been increased four times since then and at $0.43 (U.S.) quarterly is now 56 per cent higher than at the time of the original recommendation. Yield: 4.32 per cent. Weighting: 10 per cent.
Here is a summary of the portfolio using prices as of Feb. 15. Commissions are not taken into account and the U.S. and Canadian dollars are treated as being at par. Shares have been rounded up or down to the nearest five. The initial portfolio value is $49,910.30.
Security Weight/% Price Shares Yield/%
MAXA GIC 25 $12,500 125 2.45
PHN340 15 $11.60 645 3.28
CIG610 15 $12.84 585 3.43
CIG686 15 $14.40 520 6.53
BCE 10 $44.53 110 5.23
IPL.UN 10 $22.98 220 4.83
BIP.UN 10 $39.80 125 4.32
Totals 100 3.73
Overall, the portfolio should produce a cash flow yield of 3.73 per cent in the next 12 months. Obviously, that won't be enough to meet the RRIF minimum withdrawal requirement but hopefully the growth potential on the equity side of the portfolio will make up most or all of the difference. I'll review the portfolio again in six months to see how it is performing.
