Renewing a guaranteed investment certificate (GIC) is one of those financial decisions that can feel virtuous simply because it’s boring. Therefore, it feels safe, right? Well, not exactly.
A jobs report arrives, rate expectations jump around, and suddenly everyone wants to become a one-week bond strategist.
Canada’s next employment report arrives October 9. A weak result could increase expectations for lower interest rates, potentially putting future GIC rates under pressure.
I still wouldn’t make the decision based on one morning’s data. I’d make it based on when I need the money.
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Give the cash a deadline
A GIC provides a contracted rate in exchange for accepting its terms. A non-redeemable GIC can lock up your money until maturity. That makes a slightly higher rate considerably less impressive if you need the cash nine months early.
There’s also reinvestment risk. A one-year GIC can pay well today, then mature into a much lower-rate environment. Suppose $10,000 earns 4% instead of 3.75% for one year. Here’s what that might look like.
| ILLUSTRATIVE GIC RATE | ONE-YEAR INTEREST |
|---|---|
| 4.00% | $400 |
| 3.75% | $375 |
| Difference | $25 |
That’s the useful perspective. A quarter-point rate difference equals $25. A 10% decline in a $10,000 stock equals $1,000 before dividends. Those are very different risks.
Separate short-term from long-term
Money needed soon belongs in an investment designed to be there when the bill arrives. For money I can leave invested through a correction, I’d look beyond deposits and consider Canadian dividend stocks as one part of a diversified portfolio.
Power Corporation of Canada (TSX: POW) offers one example. Power owns major interests in Great-West Lifeco and IGM Financial, giving it exposure to insurance, retirement savings and wealth management.
Those businesses can grow through client assets and long-term retirement demand without requiring Friday’s jobs report to deliver a particular result.
Check the discount
Power reported an adjusted net asset value of $112.94 per share at June 30. At a recent $89.95, the stock trades about 20% below that dated figure. The net asset value isn’t a guaranteed sale price. The underlying holdings fluctuate, and conglomerates can trade at discounts for years.
Still, it gives investors something concrete to compare with the market price. Power also pays $0.67 quarterly, or $2.67 annually. Here’s what a $10,000 investment could bring in at today’s prices.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| POW | $89.95 | 111 | $2.67 | $296.37 | Quarterly | $9,984.45 |
That’s roughly a 3% yield, so it’s not a GIC replacement. The share price can also fall considerably more than $25. Holding either investment inside a Tax-Free Savings Account (TFSA) can shelter eligible income, provided contribution room is available. The account doesn’t make their risk identical.
Bottom line
If I need the $10,000 next year, I’d choose the GIC term around that deadline and stop trying to win Friday’s jobs report. If the money is genuinely long term, I’d give at least part of it more room to grow.
Power’s dividend, underlying financial businesses and asset-value discount offer that possibility. The better return may come from matching each dollar to the right timeline, not correctly guessing which way GIC rates move next week.
