Fixed Income Investing Outside an RRSP/TFSA

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Fixed Income Investing Outside an RRSP/TFSA

Post by Doug »

After taxes, inflation and expenses, it can be difficult to not lose money in fixed income investing outside an RRSP/TFSA. A conservative rule of thumb is that the percentage of one's portfolio in fixed income should be equal to one's age. For someone retiring at 55 who has to plan for a 30+year retirement, this means that 55% of one's portfolio should be in fixed income and this should increase with time. If one is withdrawing 4% yearly from one's portfolio, a high allocation to fixed income may cause problems.

What can one do about this? Preferred shares are an option, but 80%+ of Canadian preferred shares are financial which decreases diversification. Another possibility came from someone who posted on the G&M website: consider dividend paying stocks of regulated companies (utilities and pipelines). A legitimate response is that these aren't fixed income.

That response gets to the question of why one invests in fixed income. Reasons include income and liquidity. For me, I invest in fixed income to diversify equity risk. Dividend paying stocks of regulated companies are an imperfect diversifier of equity risk. Neverthless, they do provide some diversification.

I found the following relevant links about utility stocks:

http://www.usatoday.com/money/perfi/col ... vest_x.htm
http://www.deseretnews.com/article/119462/
http://safemoneymarket.com/a284764-util ... -bonds.cfm
http://www.highbeam.com/doc/1P2-1132739.html (I can't get the complete version of this)
http://search.barnesandnoble.com/First- ... 1580622882 (a title of one chapter of this book is "Why utility stocks may be a better choice than corporate bonds for many conservative investors)

The following is some Canadian content:

https://secure.globeadvisor.com/servlet ... N16ART1933
Last edited by Doug on 07 Nov 2009 07:35, edited 1 time in total.
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Post by BRIAN5000 »

it can be difficult to not lose money in fixed income investing outside an RRSP/TFSA
But it can be easy to lose money investing in stocks in or outside an RRSP
I'm not interested in handling a 30-40% loss once I'm retired.

I think 45% equity is getting up there. I will have what I consider a small DB pension. Along with dividends from a 30-40 % equity weighting and what ever I can manage out of a large the fixed income portion I think I will have enough. I hope to average somewhere around 3 - 5% on my total portfolio right now, got a ways to go. If I could get it to 4 - 6% when rates rise, be even better.
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Post by Doug »

I don't have data comparing the volatility of stocks of regulated companies to corporate bonds or stocks in general. I also don't have data comparing the returns of stocks of regualted companies to corporate bonds or stocks in general. In "The Intelligent Asset Allocator", William Bernstein states that the US stock market went down slightly more than 83% during the Depression; dividends went down 25%. I wouldn't be surprised if stocks of regulated companies went down less than 25%. I agree that it can be easy to lose money in stocks. However, if you are 55 years old and planning for a 30+ year retirement, the long term risk of losing money is most likely greater with bonds than stocks.
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Post by Doug »

http://www.indexuniverse.com/publicatio ... &Itemid=11

If you divide the S&P500 into ten sectors, the sectors correlation with the index from 1994-2008 ranges from 0.41 to 0.89. The sector with the lowest correlation is utilities at 0.41, with the second lowest being energy at 0.55. Thank to Taggart and Quebec for the link.
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Post by Doug »

When I started this thread, I looked for related threads to prevent duplication. I didn't find any. However, on closer examination, I have found some, with the links given below:

http://www.financialwisdomforum.org/for ... xed+income

http://www.financialwisdomforum.org/for ... xed+income

Back in 2005, feeonly.ca stated "In many cases after 65-70 years of age (if your health is good) a fixed annuity would be a reasonable alternative to all or part of the bond allocation. The annuity is a fixed income tool so the original rule would still apply."
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Post by BRIAN5000 »

Interesting quote from one of your posts, I don't really like it but I think he may be right.
"You don't want to be a blind holder of these stocks for the rest of your life," Mr. Baskin said. "When interest rates are rising, the second-worst thing after long-term bonds is utility stocks."
I really don't want to play a sector rotation game. I would prefer to allocate to a sector and just close my eyes. :roll:
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Post by Doug »

http://www.bogleheads.org/forum/viewtop ... ity+stocks

A relevant thread from the Bogleheads forum.
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Post by AltaRed »

BRIAN5000 wrote:Interesting quote from one of your posts, I don't really like it but I think he may be right.
"You don't want to be a blind holder of these stocks for the rest of your life," Mr. Baskin said. "When interest rates are rising, the second-worst thing after long-term bonds is utility stocks."
I really don't want to play a sector rotation game. I would prefer to allocate to a sector and just close my eyes. :roll:
Utilities (capital intensive companies) are interest rate sensitive because they carry disproportionate debt/equity loads to fund their business (always been that model with regulated tolls and tariffs). Toll increases to match interest rate load increases always lag and often a utility cannot get the regulator/shippers on board for full cost recovery. Debt is also harder to get because it puts the squeeze on margins and shipper willingness to pay higher tolls (the problem TRP can face in its natural gas shipping business if NG production volumes continue to fall in Western Canada).

Having said that, most utilities (especially TRP and DNB) have done a lot to further their 'unregulated' businesses and be less sensitive to the regulated portion of their business.
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Post by vince2 »

Do they have characteristics which would on the whole possibly simulate long bonds?

Interest sensitive
Government regulated
Long term payoff
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Post by AltaRed »

I strongly doubt it simply because their businesses are considerably more complicated than long bonds. And because they are equities, they will react somewhat to market sentiment anyway, e.g. TRP and ENB dropped some during the late 08 and early 09 market swoons.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Springbok »

If the requirement is to withdraw 4% of total portfolio. And, %fixed income should be = age, then it seems to me that you should try and earn more than 4% from the FI portion in order to provide the income required.

This is one of the worst times for FI returns, but it is still possible to find yields in excess of 4%. All you have to do is buy longer bonds. If you are 55, there is no real need to try and follow market yields by , for example, having a 5yr bond ladder.

Right now, if you go 15+ years, you can't get 4% on GOC bonds, But you can on Provincials, Municipal and Corporates.

I am hardly an expert, but I have been choosing bonds from well established companies like the Telecoms, utilities and Provs that are paying me in the 4.5-6.5% range. I look for the shortest term that will provide the return I want.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Michael D »

Springbok wrote: I am hardly an expert, but I have been choosing bonds from well established companies like the Telecoms, utilities and Provs that are paying me in the 4.5-6.5% range. I look for the shortest term that will provide the return I want.
What about risk? What about preferreds?
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Re: Fixed Income Investing Outside an RRSP/TFSA

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Michael D wrote:
Springbok wrote: I am hardly an expert, but I have been choosing bonds from well established companies like the Telecoms, utilities and Provs that are paying me in the 4.5-6.5% range. I look for the shortest term that will provide the return I want.
What about risk? What about preferreds?
Preferred's are complex, so I stay away from them. If I was prepared to take the time to study them more, I suspect they may be a good option. But for anyone like me, not fully understanding them, then we are really talking risk!

In order to make more than gov bonds will pay, you do have to take on risk. If you don't , you are dead in the water. (unless you have say, $5Million to invest and are happy with a 2% return). But you can diversify your FI so as to spread the risk.

For example, I just had a $20k bond mature. I so far I have bought two $5k corporate bonds with 5 & 6 yr maturity, one paying 4.5%, the other 6.3%. I will buy one more bond and draw the other $5k and put it in my TFSA. (This money is in my RRSP)
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Peculiar_Investor »

Springbok wrote:
Michael D wrote:
Springbok wrote: I am hardly an expert, but I have been choosing bonds from well established companies like the Telecoms, utilities and Provs that are paying me in the 4.5-6.5% range. I look for the shortest term that will provide the return I want.
What about risk? What about preferreds?
Preferred's are complex, so I stay away from them. If I was prepared to take the time to study them more, I suspect they may be a good option. But for anyone like me, not fully understanding them, then we are really talking risk!

In order to make more than gov bonds will pay, you do have to take on risk. If you don't , you are dead in the water. (unless you have say, $5Million to invest and are happy with a 2% return). But you can diversify your FI so as to spread the risk.

For example, I just had a $20k bond mature. I so far I have bought two $5k corporate bonds with 5 & 6 yr maturity, one paying 4.5%, the other 6.3%. I will buy one more bond and draw the other $5k and put it in my TFSA. (This money is in my RRSP)
Are the rates you quote the coupon rate or the yield to maturity? I've been looking around the past few weeks and from what I've found at TDW there is nothing of decent quality with a yield to maturity much above 4%.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by scomac »

Springbok wrote: For example, I just had a $20k bond mature. I so far I have bought two $5k corporate bonds with 5 & 6 yr maturity, one paying 4.5%, the other 6.3%. I will buy one more bond and draw the other $5k and put it in my TFSA. (This money is in my RRSP)
What did you buy? Based on the yields that you are quoting for the term, that sounds like these bonds are bare investment grade or worse. If that's the case, then maybe you should consider preferreds as the credit risk will be less on Pfd-2's for a similar yield.
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Re: Fixed Income Investing Outside an RRSP/TFSA

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Peculiar_Investor wrote: Are the rates you quote the coupon rate or the yield to maturity? I've been looking around the past few weeks and from what I've found at TDW there is nothing of decent quality with a yield to maturity much above 4%.
"Decent Quality" is subjective. I sweated over GMAC and Ford T-Birds for quite while even although they were investment grade when I bought them. But they eventually paid out.

The two issues I mentioned were Groupe Aeroplan with 7.9% coupon yielding 6.305% (02Sep14) BBB rating secured.
and
Riocan with 8.33% coupon yielding 4.556% (03Apr14) BBB (high) unsecured.

They are actually both less than 5yr to maturity not the 5/6 I said.

As mentioned - just $5k each. Also have bought over last while issues from Rogers, Bell Aliant, Cogeco and some others that I can't recall right now.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Michael D »

Springbok wrote:
Riocan with 8.33% coupon yielding 4.556% (03Apr14) BBB (high) unsecured.
The common yields 7.8% right now, and you'll get an increase or two over the next five years.

I wish I was shopping for bonds in the 80s.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Springbok »

Michael D wrote:
Springbok wrote:
Riocan with 8.33% coupon yielding 4.556% (03Apr14) BBB (high) unsecured.
The common yields 7.8% right now, and you'll get an increase or two over the next five years.

I wish I was shopping for bonds in the 80s.
I hope you are right about Riocan increasing it's distributions and hopefully the units maintain or increase in value too. We have it in our taxable account as a cash-flow generator. But here we are talking equity - It only has a cash on cash yield of 7.8%. Trued yield could be anything - even negative.

This discussion of investment grade corporates mentions Riocan and others as being attractively priced as of Oct 09.

Regarding shopping for bonds in 80's. We did buy bonds in that period (79-95) and in retrospect should have bought longer term bonds.

I "look at" investment grade bonds that will yield more than our retirement draw rate. I would rather buy an equity or a low MER balanced fund than buy bonds yielding no more than the inflation rate, even if risk is greater.
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by iluvnascar »

I just can't get excited about ANYTHING in the retail sector (stores and/or malls). If consumers aren't tapped out yet, they will be at some point in the near future.

I hold these bonds (bought earlier at higher yields)....but I'd buy 'em today if I was looking........

SHAW COMMUNICATIONS INC
CUSIP: 82028KAP6 Type: Corporates
Coupon: 5.65 Frequency: Semiannually
Maturity: 10/01/2019 First Coupon: 04/01/2010
First Settlement: Next Coupon: 04/01/2010
Dated: 10/01/2009 Last Coupon:
DBRS/Moody/S&P: BBBm/-/- Security Type: BND


Sell Buy
Price: 101.576 104.081
Yield: 5.4397 5.11539

Or another that I am presently looking at....although the term is a bit long for me....

ENBRIDGE INC
CUSIP/ISIN: 29251ZAQ0/ CA29251ZAQ06 Type: Corporates
Coupon: 5.57 Frequency: Semiannually
Maturity: 11/14/2035 First Coupon: 05/14/2009
First Settlement: Next Coupon: 05/14/2010
Dated: 11/14/2005 Last Coupon:
DBRS/Moody/S&P: Am/Baa1/- Security Type: BND


Sell Buy
Price: 97.241 100.892 Yield: 5.77621 5.50476
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Re: Fixed Income Investing Outside an RRSP/TFSA

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iluvnascar wrote:I just can't get excited about ANYTHING in the retail sector (stores and/or malls). If consumers aren't tapped out yet, they will be at some point in the near future.

I hold these bonds (bought earlier at higher yields)....but I'd buy 'em today if I was looking........

SHAW COMMUNICATIONS INC
CUSIP: 82028KAP6 Type: Corporates
Coupon: 5.65 Frequency: Semiannually
Maturity: 10/01/2019 First Coupon: 04/01/2010
First Settlement: Next Coupon: 04/01/2010
Dated: 10/01/2009 Last Coupon:
DBRS/Moody/S&P: BBBm/-/- Security Type: BND


Sell Buy
Price: 101.576 104.081
Yield: 5.4397 5.11539
In an attempt to education myself, I had a look at the prospectus for the Shaw bond.
Shaw prospectus from Sedar wrote:Optional Redemption
The Notes will be redeemable, in whole or in part, at the option of the Corporation at any time and from time to time at a redemption price equal to the greater of:
(1) 100% of the principal amount of the Notes, or
(2) the Canada Yield Price (as defined below);
plus, in each case, accrued interest on the outstanding principal amount of each Note called for redemption to the date of redemption. The Notes will not be subject to redemption at the election of the holders of the Notes.
“Canada Yield Price” means in respect of any redemption of the Notes issued under the Indenture, a price, as determined by the Independent Investment Banker (as defined below), equal to the sum of the present values of the remaining scheduled payments of principal and interest on the Notes (not including any portion of the payments of interest accrued as of the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 365-day year) at the Government of Canada Yield, plus 57.5 basis points.
“Government of Canada Yield” means, with respect to any redemption date, the arithmetic average, as determined by the Independent Investment Banker, of the yield to maturity on the third business day preceding the redemption date, compounded semi-annually, which a non-callable Government of Canada Bond would carry if issued in Canadian Dollars in Canada, at 100% of its principal amount on such date with a term to maturity which most closely approximates the remaining term to maturity of the Notes to be redeemed from such day as quoted by the Independent Investment Banker at 5:00 p.m. on such day.
“Independent Investment Banker” means TD Securities Inc. or its successors, provided, however, that if it shall cease to be a primary Canadian Government securities dealer in Toronto, Ontario, the Corporation shall substitute for it another primary Canadian Government securities dealer in Toronto, Ontario.
Notice of any such redemption will be given at least 15 days but not more than 60 days before the redemption date to each holder of the Notes to be redeemed.
So my understanding is that this is a "Canada callable" bond, with a commitment for 57.5 basis points above Canada's. So I looked up an Canada bond with the same appoximate maturity at PC Bond Analytics. which shows a current yield of 3.22%. Am I correct that Shaw could then call the bond at a price to yield 3.22% + 57.5bp = 3.795%?

Doesn't the bond (actually senior note) holder have potential for a lower than expected yield because Shaw has the option to call the notes at a yield below what I'm expecting based on the quoted yield on purchase? Is it the fact that Shaw has an ongoing need to issue debt, so won't tick off bold holders by taking advantage of their redemption right?

Note, I just got "In Your Best Interest, 2nd Edition" by Hank Cunningham from the library, but haven't had a chance to read it yet, so this may be covered in the book -- I hope it is.
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Source: PC Bond Analytics
Source: PC Bond Analytics
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Shakespeare »

If the call rate is below the coupon rate, won't the call have to be above par, possibly significantly? Why, under normal circumstances, would they do that?
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Re: Fixed Income Investing Outside an RRSP/TFSA

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Shakespeare wrote:If the call rate is below the coupon rate, won't the call have to be above par, possibly significantly? Why, under normal circumstances, would they do that?
I'm in grade school in my education on individual purchases in the fixed income space so hadn't thought of it from that point of view. Not fully understanding how to deal with the "call" feature, I just looked at it from the interest payment point of view, not the principle repayment view. Thanks, I've learned something new today. Is there a good reference on determining the impact of the Canada call feature that most corporates seem to have these days?
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Re: Fixed Income Investing Outside an RRSP/TFSA

Post by Shakespeare »

Norbert wrote the quoted section here some years ago. I have no idea how up-to-date it is.
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Re: Fixed Income Investing Outside an RRSP/TFSA

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Shakespeare wrote:Norbert wrote the quoted section here some years ago. I have no idea how up-to-date it is.
That would be my understanding of the Canada Call provision. In essense, it's a call provision with a floating premium.
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Re: Fixed Income Investing Outside an RRSP/TFSA

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scomac wrote:
Shakespeare wrote:Norbert wrote the quoted section here some years ago. I have no idea how up-to-date it is.
That would be my understanding of the Canada Call provision. In essense, it's a call provision with a floating premium.
This discussion has been very educational for me, thanks to all the contributions. I think I understand the concept, now I just would like to understand the math.

So getting back to the Shaw bond in particular, how does one value this "call provision" or more importantly, value the bond itself aside from the quoted yield on the broker's website? From the Shaw prospectus, the premium is 57.5 bp over Canada's.
iluvnascar wrote: SHAW COMMUNICATIONS INC
CUSIP: 82028KAP6 Type: Corporates
Coupon: 5.65 Frequency: Semiannually
Maturity: 10/01/2019 First Coupon: 04/01/2010
First Settlement: Next Coupon: 04/01/2010
Dated: 10/01/2009 Last Coupon:
DBRS/Moody/S&P: BBBm/-/- Security Type: BND


Sell Buy
Price: 101.576 104.081
Yield: 5.4397 5.11539
Edit: I've been using the Bond Calculator found here, https://www.odlumbrown.com/fixed_income_learning.html
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