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investor clinic

I have always wondered why your model Yield Hog Dividend Growth Portfolio has no oil and gas producers, which pay higher dividends than some of the other stocks in the portfolio. Why don’t you own these stocks?

I chose not to include oil and gas stocks – or resource producers of any kind – for one reason: Their earnings are closely tied to commodity prices that are beyond their control. This makes their dividends unstable and unpredictable.

I learned this lesson the hard way years ago when, straying from my core strategy of focusing on long-term dividend growth, I purchased shares of Crescent Point Energy Corp. CPG-T in my personal portfolio. At the time, Crescent Point was paying $2.76 in dividends annually and yielding more than 7 per cent.

When oil prices tumbled, however, the company slashed its dividend by more than half in 2015. Several more dividend cuts followed. Predictably, the stock price collapsed.

That was enough oil and gas for me. Now, the only energy stocks I own personally and in my model portfolio are pipelines, whose fortunes are largely insulated from the price of the commodities they transport.

Granted, in recent months I’ve missed out by not owning energy producers, as the sector has rallied on rising commodity prices. Oil and gas companies are once again raising their dividends – Crescent Point hiked its payout by 23 per cent this week, for its fourth increase in less than a year – and analysts remain bullish on the sector, even as crude oil prices have slipped from their recent highs.

But even if it means leaving a few bucks on the table now, I’m happy to stick with companies whose dividends are more stable and predictable than the payouts from resource producers. The next time energy stocks head south, I won’t lose any sleep.

I like to invest in guaranteed investment certificates maturing in one year. With interest rates rising rapidly, I am wondering if the best way to take advantage would be to go with shorter maturities of, say, 100 days. Does this make sense to you or would you take a different approach?

As I mentioned in a recent column, constructing a “ladder” of GICs with staggered maturities of one, two and three years will help you take advantage of rising rates. If you are determined to keep your maturities very short, you could, for example, invest equal portions of your money in three shorter-dated GICs – one cashable or maturing after 90 days, a second after 180 days and a third maturing in one year.

However, I wouldn’t necessarily endorse this strategy, for a few reasons. First, GICs of 90 days and 180 days are currently yielding about 1.5 per cent and 2 per cent, respectively, compared with about 4 per cent for a one-year GIC. So you will be giving up a couple of points of interest for the flexibility that short-term or cashable GICs provide. Whether you can make that back by locking in a one-year GIC at a higher rate later on is far from certain.

My second concern is that even the highest-yielding GICs aren’t keeping pace with inflation. The top five-year GIC rate is currently 5 per cent, but that’s still substantially less than the 7.7-per-cent rise in the consumer price index in May. Granted, if inflation cools considerably as the Bank of Canada hikes interest rates, locking in for five years at 5 per cent might turn out to be a good move. But if not, the GIC could lose money on an after-inflation basis.

Finally, there’s the issue of taxes. If you plan to hold your GICs in a non-registered account, the interest will be taxed at your marginal rate. As an example, say you live in Ontario and your taxable income is about $100,000. If you invest $10,000 in a one-year GIC paying 4 per cent, the $400 of interest you earn will be taxed at about 37.9 per cent, leaving you with a net $248 after tax.

Alternatively, if you invest $10,000 in a blue-chip stock that pays a 4-per-cent dividend, you would pay just 17.8 per cent in tax – thank you dividend tax credit – and keep about $329. Plus, dividend stocks offer the possibility of long-term income and capital growth, which GICs do not.

You may have good reasons to invest in GICs. Perhaps you will be needing the money for a major purchase in the next few years, or maybe you are already overweight equities in your portfolio and don’t want to take on any additional price risk. Those are valid reasons to want to protect your principal from the volatility of investing in equities. But be sure to weigh the pros and cons before deciding which GICs, if any, are appropriate for you.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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