Want 5% Growth in 2024? It’s Now or Never With a GIC

Locking in a GIC now is the smartest move you can make with interest rates coming down, but consider these options as well.

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Interest rate cuts still are pretty far from being official. Even so, most economists agree that at least by the end of this year there will be cuts coming down the line. And hey, that’s great news for those taking out loans! But it also means there’s going to be a cut in Guaranteed Investment Certificates (GIC) as well.

Why it matters

Today, you can pick up an average GIC rate of around 5%. That’s enormously high — about double average inflation. If you secure this rate now, the key here is it’s guaranteed. You can guarantee this return regardless of any interest rate changes. This can offer you some peace of mind during this unpredictable environment.

What’s more, with the potential for a future rate cut, the GIC rate will likely decrease as well. That would mean you only have a limited time to lock up this guaranteed 5%. What’s more, some institutions will likely only offer these rates for a limited time.

Even if rates come down and the GIC rate stays up, it won’t be long before institutions cut back. They’ll likely keep them up for a bit to bring in more clients through special promotions. However, if you wait, it may no longer be available when you invest.

What to consider

Before you go buy the first 5% GIC you can find, there are some points to consider. First off, consider the market. The anticipated rate cuts could come as early as June. So, if you believe that rate cuts will fall soon, locking in a 5% rate for a longer term could be beneficial, even if you plan to re-enter the market later. This guarantees a good return, even if market conditions change.

Also, consider your own personal needs. You might want higher returns than 5% each year. And that’s not going to happen through a GIC at these rates. So, you may want to consider other investments as well. Plus, consider your risk tolerance. If your risk tolerance is lower, consider a longer-term GIC, such as for retirement. If your risk tolerance is higher, perhaps consider a lower amount for longer or a larger amount for a shorter period.

Some recommendations would be a short-term market re-entry within one to two years. This would allow you to maintain some liquidity and potentially benefit from market opportunities.

Gradual market re-entry could come from a two- to five-year GIC. This laddered GIC strategy could allow you to invest across several maturity dates. This would provide a steady stream of maturing funds while still allowing you to secure good returns on investments. Finally, if you don’t know when to re-enter, perhaps take on a mid-range two- to three-year GIC. This would provide some balance between a good rate and maintaining flexibility.

A stock to consider

Once you believe it’s time to get back in the market and your GIC has matured, I would consider a dividend stock that has proven over the years to offer both dividend and share growth. For that, I would look to Royal Bank of Canada (TSX:RY) — especially if you’re risk averse.

RBC stock is the largest bank in terms of market cap. It has a long history of paying dividends, currently offering a yield of 4.19% as of writing. What’s more, it trades at 12.29 times earnings, making it quite valuable. And finally, while other stocks have trended downwards, the company is even now showing growth as it edges back towards 52-week highs.

But even better, over time, you can see even higher growth than with a GIC. You’ll have that 4.19% yield, but as well you’ll also bring in returns with a compound annual growth rate of 6.3% over the last decade. That alone is higher than the 5%, but add in the dividend, and you have a real winner!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Royal Bank Of Canada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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