GICs (Guaranteed Investment Certificates) just aren’t as bountiful as they used to be, and while the lower rates might still make sense for some people, especially for those who are extremely cautious or already have enough cash in the “risky” stock markets, I still think it’s so much easier to do a lot better by taking on some small level of risk. Indeed, no risk, no reward tends to apply to savings and GICs, especially in an environment where rates are low and could continue on the downtrend for a while longer.
While one could make the argument that the 5%-rate GICs from just a few years ago weren’t as impressive given where inflation was at (think peak post-pandemic inflation), I do think that the lower rates on GICs today remain relatively unimpressive, even if the headline inflation number is lower.
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GICs don’t seem like a great deal right now
Things still feel expensive as ever, and with 7.3% worth of food inflation in January, it doesn’t feel like inflation is tame at all. Sure, other goods are experiencing disinflation, but food prices have gotten out of control. And until food inflation is brought back under control, I think the Bank of Canada may wish to think about rate hikes rather than further cuts.
Perhaps the rate cuts have cut a tad too deeply. In any case, when your grocery visit is a shocking pain (think about those digital price tags that only seem to keep moving higher every visit!), it’s hard to feel satisfied with a GIC that pays close to 2.5% for a one-year term, especially if a vast majority of your paycheque goes towards groceries.
While I don’t have that much locked up in GICs, I do think that I won’t be looking at the asset class come their maturity. The days of great rates are gone, but I’ll give them another look if that changes. For now, dividend stocks feel like an even better relative bargain, not just because of their yields, but due to their upside potential.
Switching to a dividend ETF
At this juncture, I think the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) looks like a great bet. Of course, unlike GICs, which are “guaranteed,” the XEI is a stock ETF and stocks have risks tied to them. Arguably, the risks have the potential to be too high if you’ve got a time horizon of two years or less. If, however, you’re in it for the long run and are just parked in GICs for the long haul, perhaps it makes sense to make the shift to a dividend ETF. Today, the XEI sports a 4.2% yield, making it more attractive than just about any other TSX income ETF.
The iShares S&P/TSX Composite High Dividend Index ETF also has a competitive 0.22% MER, which is decent for an income-focused ETF due to the indexed nature. Under the hood, you’re getting a lot of energy, financials, and utilities. It’s a similar mix as the TSX Index, but with more weight on the yield-heavier names.
All considered, the XEI stands out as a great alternative to the GIC for those who value growth and income potential over a guarantee. While you won’t lose money in GICs, there’s a good chance you could lose purchasing power, especially if food inflation doesn’t retreat and fast!
Either way, between GICs and stocks, my pick is the latter.
