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The search for income in a near zero interest rate world

Updated: Jul 17, 2020

Brendan Greenwood CIM, QAFP, B.Comm | July 16, 2020

My grandfather developed Alzheimer’s later in his life and at every holiday dinner he would usually talk about the same thing forgetting he had recounted these stories before. First it would be about his time in Italy during the war, reciting memories of conversations with locals in broken Italian and then it would turn to how he had bought an annuity years ago with a 17% rate of return and that my grandmother would never have to worry about income.

You’d be hard pressed for that to be true today with the Bank of Canada rate near zero, the yield on a 10 year government bond pays less than 1%. $10,000 in annual income on $1 million isn’t going to provide for a very comfortable retirement. Low interest rates have continued to fuel demand for riskier assets. The trend continues to drive up equity valuations and saddle investors with the burden of greater volatility in their portfolios. This is a real issue in retirement when drawing income in a down market can leave you with less money.

Momentum stocks have been on a tear with valuations heading towards numbers we saw prior to the dot com bubble. If the negative 2020 revenue outlook comes to fruition valuations will surpass what was experienced prior to the dot com bust.

Bonds have often been used to minimize portfolio risk but with interest rates near zero they do not provide the yield they once did and exposure to longer duration bonds could hurt return if interest rates rise. Gold is also often used as a hedge in portfolios. The value of gold can be very volatile moving up and down sharply, plus it provides no yield. These factors make it less than an ideal investment for most people in or approaching retirement.

So how can an investor generate a decent retirement income without too much risk. It is well known that stocks that are less sensitive to the economic cycles like consumer defensive and healthcare stocks can provide more stable returns. However, these stocks don’t always pay the largest dividends. To create further diversification and reduce the risk in your portfolio consider adding infrastructure. There are many investment options today, including mutual funds and exchange traded funds that make it easier to access this asset class. Infrastructure investments can provide exposure to a diversified mix of assets in areas such as real estate, transportation and utilities.

The asset class offers:

- Higher yields then most fixed income alternatives

- Portfolio diversification through lower correlation to other asset classes

- Less susceptible to competitive forces due to monopolistic nature of asset class

- Significant investment required means assets are meant to last long-term and can provide stable long-term revenue streams

- Funds from operations could increase due to lower interest rates (increased profitability)

- Current economic environment incentivises governments to spend on infrastructure projects to spur the economic recovery fueling investment growth

If you are looking to reduce downside risk and enhance income from your investment portfolio, an advisor can help with strategies that will create more predictable outcomes for you.

Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.

For other articles authored by Brendan Greenwood on issues impacting business owners and investors see

This material has been prepared for informational purposes only and should not be considered personal investment advice or solicitation to buy or sell any securities. As well, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. Investors should seek appropriate professional advice before acting on any of the information here. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other "forward-looking statements." There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances. Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

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