Has dividend investing met its match in the 5-per-cent GIC?
Rates of 5 per cent and even a bit better are available on guaranteed investment certificates from a wide variety of alternative banks and credit unions. Given that both banks and credit unions have deposit insurance plans, there is virtually no risk of losing money in a GIC.
Should you assume more – much more – risk to get a 5-per-cent yield from a dividend stock? Three reasons stand out for going this route: potential for capital gains, the likelihood of dividend increases if you pick the right companies and tax benefits in nonregistered accounts.
But the risks of dividend investing are not to be dismissed, a point that was recently driven home for shareholders of Algonquin Power & Utilities Corp. (AQN-T). Algonquin has been a go-to dividend stock for a while, but disappointing third-quarter financial results have left the shares down roughly 34 per cent in just five days. You never have to worry about a GIC falling in value because you’re guaranteed to get your initial investment back, plus interest.
The price of safety with conventional GICs: no potential for capital appreciation, nor any growth in the amount of income you receive. Ironically, Algonquin has been a pretty good dividend growth story. Globeinvestor.com shows the company generated five-year annualized dividend growth of 10 per cent, one of the better growth rates of stocks in the S&P/TSX 60 index of big blue chips.
One area of clear dividend superiority over GICs is after-tax returns in nonregistered accounts. The dividend tax credit results in a lighter tax hit than on GIC interest, which is taxed as regular income. In practical terms, an Alberta resident making $150,000 a year would have a marginal tax rate of 20.5 per cent on corporate dividends and 38 per cent on regular income.
Some dividend stocks that look like a reasonable alternative to GICs right now include BCE Inc. (BCE-T), TC Energy Corp. (TRP-T), Manulife Financial Corp. (MFC-T), Pembina Pipeline Corp. (PPL-T) and Telus Corp. (T-T). Each offers a dividend in the range of 4.8 per cent to 5.9 per cent, a rising dividend over the past five years and 12-month declines no worse than 8.7 per cent as of mid-November. For comparison, AQN was down about 44 per cent over that period.
At one time, Algonquin would very likely have appeared on a list of blue chip dividend stocks that offered a challenge to GICs paying 5 per cent. Not today, though. The yield on AQN has soared to 9.6 per cent, which is too high for comfort.
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Rob Carrick