Buying income paying investments in Canada
This is the second post in a three part series from Frank Weiler
The investment landscape in Canada is filled to the brim with choices. In my previous post titled “Do you need income from your investments?”, I wrote that income seeking investors, and soon-to-be income seeking investors should invest in income paying investments.
What is an income paying investment?
An income paying investment is one that pays income significant enough to affect the way it trades in an open market. Take the example of an oil & gas stock that pays 8%. If the price of the stock drops, the yield could rise to 9%, and then 10%, until someone buys it up. This high yield has the effect of attracting buyers that will purchase to obtain the high yield. Generally high income paying investments are less volatile than the market index. The stocks with high and consistent yields are the least volatile. Lower volatility is generally a desirable characteristic for income seeking investors.
Another way to look at this is to say that the more consistent a dividend is, and the less likely it is to be interrupted, then the more it resembles a very long term bond. All income paying investments can be compared to the risk free rate of return on a government bond. The amount that a corporate bond for example is paying above the risk free government bond is a “risk premium”; it is riskier so the issuer has to pay more to entice people to buy it. The spread between risk-free and non risk-free investments will vary and can be a source of great opportunity.
What do income paying investments look like?
There are a variety of investments available in Canada that fit into the category I describe as “Income oriented”, these are investments that pay significant income, and can vary a great deal in risk, that’s why this is clearly an area where professional advice is required. Some of these investments include:
- Business trusts
- Oil & Gas trusts
- High yielding common shares
- Real Estate Investment Trusts (REITs)
- Preferred shares
- Convertible debentures
One thing to keep in mind is that even within each category there is a lot of variety. For example there are preferred shares that have a maturity date where your principal investment is meant to be returned and others that do not.
The amount of risk varies a lot too. Some sectors like oil & gas are generally considered riskier than others like real estate for example. There are also a lot of different risk levels within each sector as well, apartment REITs are generally considered safer than hotel REITs for example. I go over all these investments in my book including help on understanding what can go wrong and choosing one investment over another in the same industry group. I am going to explain more about how to categorize and compare investments in my next post so stay tuned.
Get professional help when needed
I am an advocate for professional advice. There are simply too many nuances to investing that can trip you up if not well understood. Many investors are finding dealing with a fee only advisor is comforting since the person is not working on a commission basis. Whatever financial advisor you use you will find it helpful and to educate yourself, this education leading to excellent conversations with your advisor that will hopefully lead to excellent financial decisions. Invest with advice for best results.
Frank Weiler, author of InSync Income, The Must Read Guide to Investing for Income in Canada. He describes himself first as an investor advocate. A former investment advisor with some of Canada’s leading wealth management firms, including RBC Dominion Securities and CIBC Wood Gundy. Frank draws from a dozen years of experience in the financial industry, including years of research, and a lifetime of unfettered curiosity to produce The Income Investor’s Advocate.
Check out Frank’s Blog: The Income Investor’s Advocate where he writes posts to try to help investors understand more about financial topics that he feels are important.
Contest to win Frank’s Book
Frank has generously donated 3 books for a draw prize. All you have to do to win is to share a story or a comment below about your experience on how you are coping with the stock market, investing for income or just on retirement given these volatile times. Every comment get and entry and on December 19th I will announce the winners for Frank’s autographed book.
I only recently came into the world of the stock market. The main reason I started investing, is that I plan to quit my job with the federal government in a few years. I was looking for a way to replace the pension that I would loose. So, during the winter of 2011 I started to buy stocks paying dividends.
Now, what I find interesting is the fact to see grow my financial knowledge. I will continue to learn the stock market and educate myself as much as I can. It is likely that in the near future I will start to use it as one of my source of income.
So far I have only invested in Mutual Funds and GICs as I’m just starting my retirement planning but will be looking into Income Investments for the future.
I am on the cusp of retirement so therefore reviewing and evaluating all of my options.
I am switching over from mutual funds to ETFs geared towards income-generation as am nearing retirement. The plan is to stay the course throughout the market volatility.
Just subscribed to Frank’s blog and would love to win a copy of his book.
I wanna invest all kinds of leisure assets in GICs.