If you’ve got a multi-year GIC (Guaranteed Investment Certificate) that’s maturing in the next few months, you’re probably not going to be all that thrilled when you look at the rates you’ll get if you’re planning on hitting the renewal button.
Indeed, 5% rates aren’t a thing anymore. And while rates have crept higher in recent months, thanks in part to higher hopes for higher rates in Canada, the latest job number might just keep the Bank of Canada on hold for a bit longer, even as the U.S. Federal Reserve, with Kevin Warsh in the chair, moves ahead with its rate hikes to combat high inflation.
And, yes, the rate of inflation came in hot in the U.S., perhaps way too hot. At the same time, though, the employment picture in America paints an entirely different kind of story, one that seems more conducive to rate hikes.
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GICs: To renew or not to renew?
In Canada, the hike decision isn’t all that simple when you consider the questionable state of employment as well as food inflation, which remains a thorn in the side of shoppers from Vancouver Island all the way to the Maritimes. In a way, it feels like there’s pressure on both sides. And for the Bank of Canada, a very difficult choice will soon need to be made.
In my very humble opinion, income investors should brace for any possibility, including a drop in bond prices as well as the broad basket of higher-yielding plays. Just how much of the rate uncertainty is priced in, though, remains the big question. In any case, I think buying today without trying to time rates remains wise, so as long as you’re ready to keep adding to a position should cheaper, higher-yielding opportunities be available a few months down the road.
As for GICs, I think more generous rates could be ahead, and so for those contemplating locking in for another three or five years, it might make more sense to consider the broader range of opportunities available. But, of course, you’ll need to take on risk regarding higher-yielding securities, especially if rates rise and capital depreciation becomes the name of the game for the dividend plays.
Hamilton Enhanced Canadian Covered Call ETF
In my humble opinion, I think something like the Hamilton Enhanced Canadian Covered Call ETF (TSX: HDIV) has a lot to offer to income investors, especially if it turns out that there’s nothing to fear with rates on this side of the border. The specialty income ETF, which pays monthly, sports an annual yield that’s currently hovering around 9.8%.
What kind of clever things are going on in the background to achieve such a payout? A combination of two techniques: a covered call strategy (that caps upside for premium income) and a “modest” amount of 25% cash leverage.
A leverage boost
The leverage seems to be a great way to add a nitrous booster to the covered call strategy, and the result. But, of course, leverage cuts both ways, and if a bear market does strike, the dips will feel around 25% more painful. For many investors who’ve been in markets for a while, though, I think 25% leverage is manageable for those fine with a bit of yield choppiness tied to options premiums at any given time.
While I’m normally against leverage, I do think that something like the HDIV has a unique risk profile that might enable investors to get more mileage from their investments with a lower degree of correlation to something like the AI trade. In other words, the levered exposure to Canadian dividend darlings is a completely different kind of risk than being heavy in the tech-heavy S&P 500.
For those who can manage such risks, the 9.8% yield, I think, looks very interesting. Now, leverage gets a bad rap in the investing world. But given the modest amount (25%), especially if rates don’t surge higher in Canada, I do think of the leverage as good debt to fund a yield boost rather than bad debt to fuel speculation in a high-flying corner of the market (think the double- or triple-levered AI ETFs).
