The Bank of Canada has been slashing interest rates at a lightning speed, from 5% in April 2024 to 2.75% in April 2025. No more rate cuts are likely in the short term unless unemployment increases. Lower interest rates will slowly seep into the economy and reduce Guaranteed Investment Certificate (GIC) rates. The highest GIC rate you can get right now is 4% for a two-year tenure. When interest rates were rising, GIC was an attractive investment. However, it is time to switch to alternatives that can beat every GIC rate, and dividend stocks are a good option.
The 8.97% monthly dividend that beats every GIC rate
A bank uses GIC to give loans to individuals and corporations with high credit scores. Timbercreek Financial (TSX:TF) uses the lending business model to give short-term mortgages to income-generating real estate investment trusts (REITs). The lender gives $0.69 in dividends per share per year from its distributable income.
This distributable income is the cash flow left after deducting the effect of amortization, accretion, unrealized fair-value adjustments, expected credit loss, and unrealized gain or loss from total net income and comprehensive income. Timbercreek paid 92.8% of the distributable income in the first quarter. While the payout ratio has increased, it is sustainable as lending activity increases.
Timbercreek Financial enjoyed high interest income in 2023 when interest rates were at 5%. However, such high borrowing costs slowed lending activity and pushed a few loans to Stage 3 recovery. Many REITs repaid loans and paused new developments until borrowing became affordable. The lender expected an uptick in new loans as interest rate cuts began in 2024, but it took a while as REITs waited for further rate cuts.
The income difference between GIC and an 8.9% yield
If you invest $10,000 in a two-year GIC offering 4% interest compounding quarterly, you will get $10,828.57 on maturity.
If you invest the same amount in Timbercreek Financial, you can buy 1,299 shares, which will pay a monthly dividend of $74.69. That converts to $896.31 per year and $1,792.62 over two years. Timbercreek Financial can pay you $964.05 more than GIC.
The lender also gives you a dividend-reinvestment plan (DRIP) in which it will automatically buy more units of Timbercreek and compound your returns.
The risk that comes with the high yield
However, this premium comes with a higher risk. Unlike GIC, where deposits up to $100,000 are insured by the Canada Deposit Insurance Corporation (CDIC), the $10,000 invested in Timbercreek Financial is subject to share price volatility.
Timbercreek Financial has been paying regular monthly dividends for the last nine years and is showing no signs of warning of any dividend cuts. In the worst-case scenario, Timbercreek Financial may see a larger number of loans going into Stage 3 and may slash dividends by 30 or 40% to $0.4414. That will reduce the dividend yield to 5.37%, still above the GIC interest rate. The bigger risk could be a 20% decline in share price.
If invested with caution, Timbercreek can be considered an alternative to a two-year GIC to earn higher income.
You could diversify investments across GIC, Timbercreek Financial, and other stocks according to your risk appetite. The end objective of portfolio diversification is to mitigate risk and enhance returns.
