Canadian seniors are using their self-directed Tax-Free Savings Account (TFSA) to hold investments that can generate steady tax-free income that won’t put their Old Age Security (OAS) at risk of a clawback.
Protecting capital is important as investors get older, but that often collides with a desire for higher returns. One strategy to consider involves holding a combination of Guaranteed Investment Certificates (GICs) and top dividend-growth stocks.
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GIC pros and cons
GICs offered by Canada Deposit Insurance Corporation (CDIC) members provide safety for the capital invested in the event the issuer goes bankrupt, as long as the amount is within the $100,000 threshold. There are reports that the government is considering expanding the limit to $150,000.
GIC rates offered on non-cashable certificates are higher than those on ones that provide more flexibility. In late 2023, investors were briefly able to get GICs with rates of 6%. Falling interest rates and declining bond yields led to declines in the rates being offered on GICs through 2024.
The recent spike in government bond yields, however, has also pushed up GIC rates offered by banks and alternative lenders. At the time of writing, investors can get non-cashable GICs in a range of 3.5% to 3.9% depending on the provider and the term. This is well above the June rate of inflation that came in at 1.9%, so the GIC is a good risk-free option to consider right now.
The downside of the non-cashable GIC is that the cash is locked up for the term. In addition, the rate earned on the money is fixed. In addition, rates available in the market when the GIC matures could be much lower.
Dividend stocks pros and cons
Stock prices can fall below the purchase price, and dividends can be cut if a company runs into a cash flow problem. This is the risk investors take on for the opportunity to get better yields and a shot at capital gains. On the dividend side, investors looking for income should consider stocks that have increased the distribution steadily for a long time.
Enbridge (TSX: ENB) is a good example of a stock with a great track record of dividend growth. The pipeline giant increased the dividend in each of the past 30 years.
Enbridge grows through strategic acquisitions and development projects. The company spent US$14 billion in 2024 to buy three American natural gas utilities. Enbridge is also working on a $28 billion capital program to drive additional earnings expansion. Increases in distributable cash flow are expected to be 3% to 5% in the coming years. This should support ongoing dividend growth. Investors can currently get a 6.1% dividend yield from the stock.
Stocks can be sold at any time to access the funds in the case of an emergency need for cash. In addition, each increase in the dividend raises the yield on the initial investment.
The bottom line
The right combination of GICs and dividend stocks depends on a person’s appetite for risk, desired average yield, and the need for quick access to the funds.
In the current environment, investors can quite easily put together a diversified portfolio of GICs and dividend-growth stocks to deliver an average yield of 4% to 5%. This is a decent return while reducing capital risk.
