Back when interest rates were low, it was common for people to question the wisdom of keeping money in a savings account.
Savings accounts from alternative banks offer as much as 4.1 per cent interest today, which means a real return of 0.8 per cent after accounting for inflation. Considering the risk level is pretty much zero, that’s not bad. But some people still wonder if there are better options than savings accounts.
Like a dividend stock, for example. Recently, a reader asked if it was better to have money in a “solid blue chip utility stock with a good dividend.” The answer is no. A savings account is better for two reasons - safety and liquidity.
As discussed in a recent column, a lot of big names in Canadian dividend investing have been hammered this year. There are a few reasons for this, but the main issue is high interest rates. Investors can get high returns from risk-free investments like bonds and treasury bills, so why take the risk of a dividend stock?
Depressed prices for dividend stocks mean high yields - as much as 6 to 7 per cent, which beats savings accounts by a lot. Dividends look even better on an after-tax basis in non-registered accounts because they’re taxed more lightly than interest income.
Think of the extra returns from dividends compared to savings as a risk premium. Risk of what? Falling share prices, for one thing. Your attention is drawn to a former dividend stalwart, Algonquin Power & Utilities Corp. (AQN-T), which is down about 47 per cent in the past 12 months. The reason for this decline highlights another risk, that of dividend cuts. Algonquin lowered its dividend by 40 per cent earlier this year to shore up its financial position.
Dividend cuts by blue chippers are quite rare, but the list of companies that have trimmed their payouts in the past does include names like Manulife, SNC-Lavalin, Telus and TC Energy, back when it was TransCanada PipeLines.
Savings accounts are backed either by Canada Deposit Insurance Corp. or provincial credit union deposit insurance plans, so there’s no risk of losing money if you stay within coverage limits. Savings accounts also offer superior liquidity. If you have an unexpected expense, you can often pay the bill right from the savings account, or e-transfer money to someone. With a dividend stock, you’ll need to sell, wait for the trade to settle and then transfer the money to your chequing account. And what if the market’s way down on the day you need to sell?
One final thought is that you don’t need to settle for the returns of bank savings accounts. Investment savings accounts sold like mutual funds offer yields as high as 4.55 to 5 per cent these days – they’re typically protected by deposit insurance and can be bought through most online brokers at no cost.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
The Rundown
Inside the strange behaviour of ‘Sell in May, and go away’
Strange behaviour can afflict the stock market and, as it happens, a particularly persistent anomaly can be traced back to 1693. You likely know it by the adage to “Sell in May, and go away,” while others refer to it as the Halloween indicator. The idea is to sell your stocks at the end of April each year, hide out in Treasuries (or bonds) and buy back into the market at the end of October. Norman Rothery looks at some extensive data to see if the adage actually pans out.
Does market forecasting have any value?
Expert market calls are effective at getting investors’ attention. In a couple weeks, the pros will be returning from the Hamptons and Muskoka, and getting back to the work of forecasting what the rest of the year might hold for the unwashed masses. But does market forecasting have any value at all? As Tim Shufelt reports, plenty of research suggests that it does not.
Want to grow your retirement income every year? Dividend growth stocks like these deliver
Owning dividend growth stocks in retirement is like having an employer who offers generous wage increases every year. As Rob Carrick tells us, this collection of 21 stocks tracked by dividend investing authority Tom Connolly produced an average annual 7.8-per-cent increase in cash payouts to shareholders over the past 10 years.
Summer of angst as bond yields surge and global stocks wobble
Cracks are forming in a global stocks rally, with surging bond yields, rising energy prices and intensified worries over China’s economy among the factors sapping investors’ risk appetite following months of gains in equity markets. Here are five corners of the market investors are paying particularly close to attention to.
Also see:
Less cash, fewer bears could leave U.S. stocks vulnerable
U.S. stocks may start to question economic resilience, says Morgan Stanley
How hedge funds are positioning themselves for a soft landing
The dark side of crypto
Gordon Pape has never thought of cryptocurrency as “money.” His mind cannot accept the contention that a bit of computer code can translate into a store of value. Now, a new book has strengthened his anti-crypto stance even further.
Robust equities erode gold’s safe-haven allure as ETF holdings fall
Receding fears of a U.S. slowdown, surging bond yields and the robust performance of equities have gradually eroded the appeal of exchange-traded funds backed by traditional safe-haven gold this year, despite sticky inflation. Reuters reports.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
The highest-yielding stocks on the TSX, plus risk data
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: CEO invests over US$3-million in this depressed telecom stock
Globe Advisor
Why this money manager is hanging on to tech stocks and adding more resources
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
Ask Globe Investor
Question: I use the Watchlist on Globe Investor to track my stocks, but it doesn’t recognize the iShares MSCI USA Quality Factor ETF (QUAL-A). Can you please add this exchange-traded fund to The Globe’s list of stocks.
Answer: When calling up stock quotes or adding securities to a Watchlist on Globe Investor, the autocomplete feature can be a bit finicky at times. This is especially true for U.S. stocks and exchange-traded funds. But some trial and error usually fixes the problem.
In the case of QUAL, you won’t get a match if you enter only the stock symbol. Nor will the autocomplete work if you enter only the first two or three words of the ETF’s name. However, if you type “iShares MSCI USA Quality” (without the quotes) in the search box, you’ll find the ETF you’re looking for. If you are having trouble finding any other securities, a little tinkering should resolve the issue.
--John Heinzl
What’s up in the days ahead
Gordon Pape will take a look at the state of dividends in the Canadian energy sector.
Nvidia earnings will be major test for AI demand, market rally
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff