GICs (Guaranteed Investment Certificates) haven’t been this competitive with stocks and bonds in quite a long time. Though certain financial institutions offer rates at or north of the 5% mark, many of the big banks we do business with (think the Big Six) still offer so-called “special” rates that are still below 5%. Indeed, it can be quite inconvenient as an investor to shop around for GIC rates outside of your personal bank.
Though it may be worthwhile for some investors seeking to put up a considerable sum (think $10,000 or more), I do view “special bank” GIC rates as worth banking on, especially if you’re able to negotiate with your financial advisor for a more competitive rate.
For now, though, you can expect a rate of around 4.5% or so on a term of about a year or more. The longer the duration (think more than three years out), the lower rates will be in the cards.
Why?
Rates are probably not going to stay at these heights for the long haul. If anything, falling inflation and a turbulent economy could pave the way for rate reductions at some point in 2024 or 2025. Of course, it’s difficult to precisely tell when rates will decline and where they’ll ultimately spend most of the next three years.
GICs are bountiful, but don’t count out stocks!
For now, GICs are a very bountiful way to diversify your investments. As attractive as they are relative to risk assets, I’d still argue that stocks are more suitable for younger investors seeking to build a retirement nest egg over the course of decades.
With rates, you won’t risk your invested principal. What you see is what you’ll get. Nothing more, nothing less. With stocks, you can lose money. But you could also benefit from substantial capital appreciation over time. And if you buy a stock at a discount to maximize your margin of safety, you can optimize your risk/reward. In that scenario, I’d argue it may not be the best idea to put all of one’s eggs into the risk-free (GIC) basket.
Let’s have a closer look at a stock that looks cheap and can help you meet your passive income goals.
TD Bank: A passive income bargain
The banks don’t get enough love these days. And that’s why I’m such a bull on them, especially U.S.-heavy Canadian banks, like TD Bank (TSX:TD).
Undoubtedly, the bitter aftertaste from the March–April U.S. regional banking crisis is still being tasted by many shareholders. TD walked away from a big regional deal. And as a result, the bank is now flush with cash. Arguably, it’s one of the best-capitalized banks in Canada right now. In the face of a recession, that’s a good thing.
As TD buys back stock, while continuing to pay the juicy dividend (yield of 4.75%), I view TD stock as a magnificent value bet for any income-focused investor. Bay Street seems too focused on the negatives right now, with less in the way of optimism over the durability of the business and its more promising long-term trajectory.
The bottom line for investors weighing GICs versus passive income stocks
GICs are great picks right now if you’re looking to take risk off the table. However, I don’t view them as the best asset to own from a total return standpoint, especially if you’re young. TD Bank stock, I believe, could beat GIC returns over the next 12–18 months.
