# Best Income Producing Investments for a New RIF



## Belguy (May 24, 2010)

I turned 71 this year and now must think about possible restructuring of my RRSP in preparation for converting it to a RIF before year's end. I would prefer to maintain a simple Couch Potato portfolio for my retirement years but one with an emphasis on income producing investments. My target asset allocation would be 10 per cent cash, 60 per cent fixed income, and 30 per cent equities.

Any suggestions for low fee investments for each component of this portfolio would be appreciated and thank you in advance for your assistance.


----------



## andrewf (Mar 1, 2010)

A good income generating investment? Whatever you have now + selling a % each year to maintain your allocation and generate the necessary cash flow.

You're welcome.


----------



## My Own Advisor (Sep 24, 2012)

Hey Belguy,

Unless you're prepared for more active management and use of dividend paying stocks, then you'll probably end up keeping your current ETFs or index funds, roll those over to a RRIF, and selling some holdings every year to fund your retirement.


----------



## gibor365 (Apr 1, 2011)

It's difficult to say without knowing your RRIF amount... If your 30% equities allocation is 5K it's different if it's 200K 
For fixed income as a options: VSC/CBO, XBB and HYG, PCY for divercification.
For equities, I personally would go with dividend champions who pays decent dividend and increase it every year like T:NYSE, MO, MCD, CVX etc ...to increase yield take a look at SDRL , more than 10% yield and looks pretty secure...


----------



## HaroldCrump (Jun 10, 2009)

How much portfolio underperformance are you willing to tolerate in order to boost distributions?
High yield stocks such as MICs, REITs, LPs, etc. spin off monthly cash flow, but often it comes at the expense of growth.

Alternatively, you can take a portion of your bond allocation and gear it towards the lower end of investment grade bonds and go further out in duration to squeeze slightly more yield.
You can also allocate a small portion to convertible debentures and pref. shares.
Each of these options will place you higher on the capital tier (i.e. more certainty around monthly income) and still ensure you have exposure to growth equities.


----------



## Belguy (May 24, 2010)

I am under the impression that investing in REIT' s and preferreds in a rising interest rate environment is not recommended. The trick there is when will interest rates finally start to rise?

For a bond allocation, would VSB be reasonable or would a broader bond fund such as XBB make more sense for a RIF at the present time?


----------



## HaroldCrump (Jun 10, 2009)

I think it is more accurate to say investing in long duration securities is not recommended in a rising rate environment.

It should be alright to invest in a diversified portfolio (ideally via an ETF) of mixed duration bonds that get rolled over regularly.
That way, as rates rise, any capital losses on existing bonds will be offset by higher yields on new issues.

Anyhow, in general, any strategies that focus too much on maximizing distributions (yield) probably end up underperforming a balanced portfolio of growth/value securities.
If you need the monthly income for living expenses, you can allocate a portion to convertible debentures, pref. shares, and high yield bonds - keeping in mind that it may well under-perform the broad market.
That is the trade off.
Since you are in the portfolio "deaccumulation" stage, such trade off is probably alright.


----------



## AltaRed (Jun 8, 2009)

Why convertible debentures rather than non-convertible debentures (recognizing both are unsecured)?

FWIW, I agree with a balanced asset allocation, but I would use a 5 year GIC ladder rather than A/AA/AAA investment grade corporate bonds (because currently the yield is as good or better in a GIC ladder than in high grade bond ETFs net of MER). One has to get into the B/BB/BBB range to 'better' GIC rates. A GIC ladder is simple to execute once set up. My plan is to have enough (or at least half) in a maturing GIC each year in my RRIF to pay for the minimum withdrawal. Hopefully, dividends and distributions from the other securities will supplement what the GIC cannot/does not provide. That way I will avoid crystallizing too much in bonds or equities in a potentially 20008/2009 type year.

P.S. to Belguy. VSB has a poor yield net of MER relative to a GIC ladder for about the same duration.


----------



## Belguy (May 24, 2010)

Can we reach any consensus that, for RIF purposes, a GIC ladder is currently a better choice than VSB aside from the liquidity issue?


----------



## Ihatetaxes (May 5, 2010)

I would say stick with a GIC ladder. You are fairy conservative, correct? Might sleep better knowing 60% of your money is extremely low risk in your retirement years.

I am in my 40's and have 15% in a 5 year GIC ladder and 5% in XSB. Working for my mental health and although conservative/boring I am ahead of plan and achieving my goals.


----------



## AltaRed (Jun 8, 2009)

Belguy said:


> Can we reach any consensus that, for RIF purposes, a GIC ladder is currently a better choice than VSB aside from the liquidity issue?


I would say yes, at least until spreads among various bond credit ratings reverts to more normal historical levels. You might consider a mix of a GIC ladder and a 'riskier' bond ETF to juice yields a bit. Example is ZCM which has mostly B/BB/BBB corporate bonds in it.... Still investment grade but not the upper blue chips. There are other examples but unless you are paid enough above what a 5 year GIC ladder would give you (currently almost 3% but degrading to the 2.6% range as older GICs mature), why go there? How much spread is enough is in the eyes of the beholder.


----------



## Belguy (May 24, 2010)

Ah, the 40's. Been there, done that. Congratulations on exceeding your financial goals. Avoid greed and taking unnecessary chances.


----------



## Moneytoo (Mar 26, 2014)

AltaRed said:


> FWIW, I agree with a balanced asset allocation, but I would use a 5 year GIC ladder rather than A/AA/AAA investment grade corporate bonds (because currently the yield is as good or better in a GIC ladder than in high grade bond ETFs net of MER). One has to get into the B/BB/BBB range to 'better' GIC rates.


What about CBO?

MER 0.28%
Monthly distribution, Yield 4.17%
Only A, AA and AAA corporate bonds

http://ca.ishares.com/product_info/fund/overview/CBO.htm


----------



## AltaRed (Jun 8, 2009)

Distribution yield is not the effective return you get over time. There will be capital losses because of the premium priced bonds. It is critical to use YTM as the measure of investor return. That is only 1.85% and when one subtracts MER of 0.28, you have less than you can get in a HISA.


----------



## andrewf (Mar 1, 2010)

It's another excuse for me to say that distribution yield doesn't matter. What matters is risk-adjusted total return. DO NOT pick investments based on the cashflow it will generate.


----------



## Belguy (May 24, 2010)

Any thoughts on an old geezer including the Horizons Floating Rate Bond ETF HFR in his RIF or is this moving away from the goal of simplicity?


----------



## gibor365 (Apr 1, 2011)

Belguy said:


> Can we reach any consensus that, for RIF purposes, a GIC ladder is currently a better choice than VSB aside from the liquidity issue?


But to build the ladder you need 5 years, no?!


----------



## Moneytoo (Mar 26, 2014)

AltaRed said:


> Distribution yield is not the effective return you get over time. There will be capital losses because of the premium priced bonds. It is critical to use YTM as the measure of investor return. That is only 1.85% and when one subtracts MER of 0.28, you have less than you can get in a HISA.


Looks like no matter how much I read about Bonds - ill never understand them... Picked CBO after reading this article: http://www.moneygeek.ca/weblog/2013/06/01/open-challenge-canadian-couch-potato, and heard so many bad things about GICs that never questioned that they are just a waste of one's time


----------



## james4beach (Nov 15, 2012)

Stick to GICs for your fixed income portion. They have a superior total return to bonds, even corporates.



Moneytoo said:


> What about CBO?
> 
> MER 0.28%
> Monthly distribution, Yield 4.17%
> ...


Distribution yield maybe, but yield to maturity is only 1.85% and that's before the 0.28% MER. After MER, the yield of CBO is 1.57% -- see AltaRed's post.

Getting back to the original question. There's a really big distinction between (X) cashflow generated by the portfolio, and (Y) the yield it earns or grows at. They are two different things! Here's the way I think about it. The rate at which the portfolio grows/earns is pretty much fixed, just accept the fact that you can't change this parameter. Fixed income is going to yield around 2%, end of story. Equities are going to have some total return, unpredictable, and that's beyond your control too.

So whether you invest in (GICs + XIU) or a complex mish-mash of exotic ETFs, you're probably going to earn the same rate of growth. Why? Because there's no such thing as free money, and everything tends towards market averages. So either way, your investments are going to grow at rate (Y).

When you ask on here 'what are the best investments to produce income' it's not clear to me whether you're asking to maximize (X) or (Y).

If you're trying to maximize (Y), don't bother, because you can't. I think this is where most people get caught up... you can play around by shifting your allocations more towards REITs, or junk bonds, etc but if you achieve a higher total return that's just lucky. *(Y) is beyond your control and boring index ETFs are as good as anything else.*

But if you want to maximize (X) there are many ways you want to do it. One answer is: sell off your assets. Now it becomes a question of how to efficiently do this while minimizing fees.

Yes, if the goal is (X), then ETFs with large distributions could make your life easier. It's fine as long as you realize that you're not going to change (Y)

You're basically 70% fixed income and 30% equities. Here's one idea (I'm trying to keep it simple)
- put most of the equities in e-series index funds because there are no fees to sell
- put most of your fixed income into a GIC ladder
- keep a couple years worth of fixed income in a high interest savings

This portfolio will achieve the same (Y) as you'll get anywhere else. Now you can tune (X) as you wish by extracting cash and selling index fund shares


----------



## Moneytoo (Mar 26, 2014)

james4beach said:


> Distribution yield maybe, but yield to maturity is only 1.85% and that's before the 0.28% MER. After MER, the yield of CBO is 1.57% -- see AltaRed's post.
> 
> Getting back to the original question. There's a really big distinction between (X) cashflow generated by the portfolio, and (Y) the yield it earns or grows at. They are two different things! Here's the way I think about it. The rate at which the portfolio grows/earns is pretty much fixed, just accept the fact that you can't change this parameter. Fixed income is going to yield around 2%, end of story. Equities are going to have some total return, unpredictable, and that's beyond your control too.


Sorry, still don't get it... From another article:

Understand that stock return = dividend yield + share price growth. For example, a company that pays a 5% dividend yield and appreciates by 5% every year has an annualized 10% total return. 

http://m.wikihow.com/Invest-in-Dividend-Stocks

If this is true - shouldn't CBO's total return be calculated as 4.17 + 1.57 = 5.74%? Which is about twice as much as GICs? Or it's only true for stocks and not for Bonds ETFs?


----------



## AltaRed (Jun 8, 2009)

gibor said:


> But to build the ladder you need 5 years, no?!


Yes, and it will take 5 full years to get that ladder going (at maximum return) IF one has no GICs to start with. If it is important to start one today, it can be done by putting equal amounts into 1, 2, 3, 4, and 5 year GICs. When the 1 yr GIC matures, re-invest it (or some sold equities for example) into a new 5 year GIC. Rinse and repeat a year later with the maturing 2 yr GIC, etc, etc. Once it is going, it is a breeze.

It is true aggregate yield in a ladder started today won't be as good as when the 5 year ladder is fully functioning but that is only because one had to buy a GIC of each maturity to get it going. One has to start somewhere. I have had a 5 yr GIC ladder going for many years now as a substantial part of my RRSP. It will still be going when I convert to a RIF in about 7 yrs.


----------



## GreatLaker (Mar 23, 2014)

*Distribution Yield vs. Yield to Maturity*



Moneytoo said:


> Sorry, still don't get it... From another article:
> 
> Understand that stock return = dividend yield + share price growth. For example, a company that pays a 5% dividend yield and appreciates by 5% every year has an annualized 10% total return.
> 
> ...


The equation you mention applies to stocks over the long term not to bonds, and depends on future dividend yield and share price growth, so is hard to predict. There are lots of things that can impact a stock price in the short term to cause it's price to deviate from that equation

For bonds you are confusing share price growth with the bond's yield to maturity. Distribution yield (4.17 in this case) is how much interest the bonds in the ETF yield, based on their coupon and face value. But since interest rates have dropped since the bonds were issued, the market price of the bonds went up. So when they mature at face value, there will be a capital loss. The yield to maturity (1.85%) is what's left after both the interest payments after the capital loss are taken into account. 

If you really want to learn this stuff, read the Four Pillars of Investing by William Bernstein.


----------



## Moneytoo (Mar 26, 2014)

gibor said:


> For fixed income as a options: VSC/CBO, XBB and HYG, PCY for divercification.
> For equities, I personally would go with dividend champions who pays decent dividend and increase it every year like T:NYSE, MO, MCD, CVX etc ...to increase yield take a look at SDRL , more than 10% yield and looks pretty secure...


I decided to do some more googling on "Short term corporate bonds vs GICs" - and found this old thread: http://canadianmoneyforum.com/showthread.php/9219-Short-term-bonds-vs-GIC 

Just bought some AT&T on Monday, was looking at SDRL, but bought PSEC (10%+ dividend) and Noble Corp. (another offshore sea driller with smaller div, but looked less risky) instead - i.e. I personally would take your advice as I seem to be doing just that (but not retiring any time soon thou, so have some growth stocks as well )


----------



## Belguy (May 24, 2010)

I'd prefer to keep this thread on topic concerning the appropriate structuring of a RIF in retirement.

The consensus so far seems to be to utilize a ladder of bonds for the fixed income allocation rather than a bond fund whether short term or broad based.

Any dissenters?


----------



## james4beach (Nov 15, 2012)

Ladder of bonds? If you mean corporates, I dissent.

Selecting individual bonds requires a lot of skill. It also doesn't work (with corporates) unless you have an enormous amount of money, because you have to be careful to diversify your exposure. There's also been a proliferation of non-standard corporate bonds in the last few years, especially in the junk space. There are so many more dimensions to bonds than just the credit grade and maturity date! Unless you're already a bond expert I would strongly discourage you from trying to build a portfolio of individual corporate bonds.

Default rates are also back to historical lows. At some point default rates will rise and things will get a lot uglier, and then you may see the beauty of holding a GIC portfolio instead. I have a really hard time believing that you can get better risk-adjusted yields in corporates, versus GICs. I can demonstrate is easily:

Look at XCB, an index of corporates. Their portfolio has an 8 year term and yields 2.73 - 0.44 = 2.29% after fees. You have to include the fees because you're going to suffer similar fees trading corporates yourself.

Now compare that to GICs, which are safer investments. At only 5 year term and even with CDIC (federal!!!) insurance they yield 2.6%.

That's a no-brainer. The GIC, with less risk, shorter term, and federal guarantee yields more than 'investment grade' corporates. Even if you do the corporates yourself, you're not going to achieve much better than 2.29% that XCB does.

And if you put together a portfolio that does yield more than what XCB can, it's because you're picking up higher risk bonds. And when you get into lower grade bonds and junk, you get into a more dangerous space that requires even more skill and expertise. It's very tricky stuff.

I don't see how you can beat GICs for the fixed income.


----------



## james4beach (Nov 15, 2012)

By the way, junk bonds correlate pretty highly with equities. They trade like equities so everyone who has been in junk for the last few years has experienced tremendous returns. While they don't realize it, these people have moved away from fixed income investing and are basically back to equities risk-taking. In your original post you said 70% fixed income and 30% equities. Well if you start putting lower grade bonds in there, you should be shifting them to the "equities" side of your risk ledger.

What I'm getting is that, yes of course junk/less-than-investment-grade bonds can give better returns... in a strong equities market. So can just increasing your equity exposure. But if you're driving for fixed income exposure you really should have either GICs, investment grade corporates (the stuff that yields 2.3%) or government bonds. Those things belong in the fixed income bucket.

If instead you start putting lower grade bonds into your portfolio, you're kind of fooling yourself because you're effectively boosting your equities exposure.

During the '08 crash for instance, stocks fell around 50%. Junk bonds fell 40% and US investment grade corporates still fell a whopping 20%.

The whole point of having fixed income exposure is to protect yourself from wild swings and declines. Corporates -- especially lower grade -- really don't do that. *Only GICs, government bonds and short-term bonds achieved that*. So those are the things I use for fixed income exposure... because otherwise, it might as well be equity exposure.


----------



## Belguy (May 24, 2010)

And so, all things considered, a ladder of GIC' s might be as good a choice as any for the fixed income allocation in a RIF and a better choice than VSB?


----------



## AltaRed (Jun 8, 2009)

Belguy said:


> And so, all things considered, a ladder of GIC' s might be as good a choice as any for the fixed income allocation in a RIF and a better choice than VSB?


I think that is what everyone is trying to tell you. VSB yield to maturity is only 1.6% less MER of 0.17 = pathetic.... on an average duration of 2.7 years (more than a 5 year GIC ladder). 

Look at the ETF fund fact sheets for yourself on any number of Vanguard, iShares or BMO ETFs. The 3 main data points are: Yield to maturity, MER (which must be subtracted from YTM for actual return), and Duration. Compare that to a 5 year GIC ladder of 2.6% or better and average duration of 2.5 years. Unless you want to go medium term, e.g. 6-8 years, or long term and take the interest rate risk, it is a bit of a no brainer.


----------



## Belguy (May 24, 2010)

Got it! Thank you very much. A ladder of GIC' s it shall be for the 60 per cent fixed income component and a HISA for the 10 per cent cash allocation in my LIF.


----------



## gibor365 (Apr 1, 2011)

Today was checking GIC rates....in my discount brokerage (CIBC) , the best rates: 1y - 1.85, 2y - 2, 3y - 2.15, 4y - 2.33, 5y - 2.61 (average 5year yield = 2.188%).
In Peoples Trust , 1y - 2.3, 2y - 2.25, 3y - 2.35, 4y - 2.4, 5y - 2.6 (average 5year yield = 2.38%).
Even 3 years ladder in PT gives 2.3%
Not sure if PT offers RIF, but definitely I'd consider creating ladder in some online bank


----------



## gibor365 (Apr 1, 2011)

Moneytoo said:


> Just bought some AT&T on Monday, was looking at SDRL, but bought PSEC (10%+ dividend) and Noble Corp. (another offshore sea driller with smaller div, but looked less risky) instead - i.e. I personally would take your advice as I seem to be doing just that (but not retiring any time soon thou, so have some growth stocks as well )


Both looks OK, but Noble Corp is ADR, won't you be paying div witholding tax?
PSEC has payout ratio 110% ...too high....


----------



## Moneytoo (Mar 26, 2014)

gibor said:


> Both looks OK, but Noble Corp is ADR, won't you be paying div witholding tax?
> PSEC has payout ratio 110% ...too high....


Everything's in RRSP, so no withholding tax I gather  And PSEC was recommended on this forum (together with SDLR) - with a link to wealthyretirement.com articles lol:

_______________ 

This guy explains why its an extremely safe dividend...

http://wealthyretirement.com/nyse-sdrl-six-reasons-11-1-yield-a-rated/

that guy quoted Royal bank as a B rated...

There's another high yield too with A rating..
http://wealthyretirement.com/nasdaq-psec-another-a-rated-double-digit-yield/
______

Anyways, this thread is not the proper place to discuss dividend stocks - sorry!


----------



## gibor365 (Apr 1, 2011)

Moneytoo said:


> Everything's in RRSP, so no withholding tax I gather  And PSEC was recommended on this forum (together with SDLR) - with a link to wealthyretirement.com articles lol:
> 
> _______________
> Anyways, this thread is not the proper place to discuss dividend stocks - sorry!


Not sure if you correct.... It's true for US stocks because of treaty (except LPs and REITs), so it depends on treaty with GB... I can tell you for sure that i was paying 15% witholding tax on Israeli ADR even though was holding it in RRSP


----------



## Belguy (May 24, 2010)

My LIF thread was hijacked!!!!


----------



## AltaRed (Jun 8, 2009)

Belguy said:


> My LIF thread was hijacked!!!!


It is inevitable to some degree. That said, some folks don't understand, or don't care, about forum protocol.


----------



## Moneytoo (Mar 26, 2014)

gibor said:


> Not sure if you correct.... It's true for US stocks because of treaty (except LPs and REITs), so it depends on treaty with GB... I can tell you for sure that i was paying 15% witholding tax on Israeli ADR even though was holding it in RRSP


Oh I just googled - it's Noble Group which is ADR, and I have Noble Corp. (NE-N), and it looks like a regular stock... But it's not Fixed Income for sure, and obviously not "Best Income Producing Investment for a New RIF", so lets not question the consensus between AltaRed and james4beach - or Belguy might start doubting their GIC strategy... lol


----------



## AltaRed (Jun 8, 2009)

Moneytoo said:


> Oh I just googled - it's Noble Group which is ADR, and I have Noble Corp. (NE-N), and it looks like a regular stock... But it's not Fixed Income for sure, and obviously not "Best Income Producing Investment for a New RIF", so lets not question the consensus between AltaRed and james4beach - or Belguy might start doubting their GIC strategy... lol


It is the derailment of the thread's purpose that is the issue, not a GIC strategy. Still don't get it?


----------



## gibor365 (Apr 1, 2011)

AltaRed said:


> It is the derailment of the thread's purpose that is the issue, not a GIC strategy. Still don't get it?


OP mentioned that he wants to invest 30% into equities, so discussion about dividend stocks for his RIF (or LIF - both names appears there) is appropriate... In any case , we will let you to have "the consensus "... 
Moneytoo, I replied you on "What are you buying?" thread


----------

