1

This question is an adjunct to this one, which I've asked previously:

Asset allocation when retirement is already secure

In that question one potential path was recommended where I invest in safe securities as the likelihood that I won't have a comfortable retirement approaches zero. And it might make sense to increase my propensity for risk as that becomes the case.

So the question I'm proposing now is, if I went this route and decided to focus on somewhat safe securities, what would a viable path in doing this look like?

Currently I have about 19 years left on my mortgage with a 5 year 2.85% interest rate. This seems like a logical place to earn, although I would also be concerned about liquidity. I've also looked into GICs, and they don't seem like they would do much better than inflation.

So I wonder what avenues I might be able to take to outpace inflation, but keep my savings more or less in tact, in Canada.

2

If your objective is fixed income with more modest risk and you want a reliable dividend stream, consider traditional preferred stocks (avoid convertible and adjustable rate preferreds unless you clearly understand them). Here are some general characteristics:

  • It's a hybrid security which represents equity ownership in a company but has fixed payments like bonds. Its price doesn't gyrate around from earnings announcements and most other market events.

  • The yield is usually higher on than on the common stock of the same issuer.

  • They have a call feature (usually 5 years after the issue date) which gives the company the option to buy back the shares at the issue price. This can be a problem if rates go down and issues are called. replacements will be at a lower yield.

  • They act like long term bonds and will behave like bonds ( price moves in the opposite direction of interest rates). If you won't need the principal in the foreseeable future, the interest rate cycle is unimportant. Secondarily, share price will be affected by the issuer's credit rating.

Investment grade Pfds currently pay about 6%. As a general rule, consider only “cumulative” issues which requires the company to pay missed preferred dividends before it pay dividends to common shareholders. IMHO, if this comes into play, you've far overstayed your welcome.

Because most Pfds have low trading volumes, it doesn't take much to move their price. With some diligent swapping, you can easily bump the 6% yield to 9-10%. When we had a normal interest rate cycle (pre 2008), it could be bumped even higher.

Note that all investments have risk. These are lower on the risk scale but at times they move up sharply (see 2008 when many financial preferreds lost 1/3 to 2/3 of their price). For that reason, they are also good for shorting when under duress but that's beyond the scope of your question.

  • By swapping, do you mean arbitrage/market-making between those trading at a premium and at a discount? – nanoman Feb 25 at 2:00
  • In terms of "arbitrage/market-making between those trading at a premium and at a discount", well, no, not really. If you're looking to capitalize on yield discrepancy, you can do long/short pairs looking to capture some reversion to the mean. Swapping is simply exchanging, flipping, trading, or whatever you want to call closing one position and opening another. Why wait 3 months for a 1.5% dividend if you can book a large portion of that as a cap gain in mere days or weeks? – Bob Baerker Feb 25 at 4:41
  • A post script to my answer is that my perspective is one based on preferred stocks trading on U.S. exchanges. I don't know how much of my answer is applicable to Canadian securities. – Bob Baerker Feb 25 at 4:46

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