Stock Market: Yields Are On Sale, But the Bargains May Not Last Long

Income-oriented investors must be feeling like kids in a candy store these days. There are great deals everywhere you look.

Whether you prefer stocks, ETFs, REITs, or preferreds, cash flows of 5 per cent up abound. We haven’t seen anything similar in decades.

The reason for this yield bonanza is clear — inflation, which has prompted the Bank of Canada and the Federal Reserve Board to increase interest rates at the fastest pace in 40 years. Combined with an inverted yield curve, the result has been across-the-board increases in investment cash flow.

Even short-term securities have cracked the 5 per cent ceiling. Based on the current level of distributions, HISA (High Interest Savings Account) ETFs are currently yielding around 5 per cent. They include the CI High Interest Saving ETF (CSAV-T), which currently has a forward yield of 5.1 per cent based on my calculations. The Purpose High Interest Savings Fund (PFA-T) and the Horizons High Interest Savings ETF (CASH-T) both have a forward yield of 4.9 per cent.

It’s important to note that neither forward nor trailing yields are accurate predictors of what your money will earn over the next year in these funds. Trailing yield will skew the return to the downside because rates were much lower a year ago at this time. Forward yields assume the current rate of the monthly distribution will be maintained. That’s unlikely in this turbulent interest rate environment. So, be sceptical of yields in these funds and be prepared to move money quickly if they start to decline.

Unusually, HISA ETFs offer better yields at this time than traditional bond ETFs and mutual funds. But you can find bond fund returns in the 5 per cent range in some fringe areas.

One example is the iShares U.S. High Yield Bond Index ETF (CDN Hedged) (XHY-T). The name tells the story. The fund invests in a wide-ranging portfolio of U.S. high-yield bonds. At a current monthly distribution of $0.078 ($0.936 annually), the forward yield is 5.85 per cent. The ETF lost 11.5 per cent in 2022 but is ahead 5.2 per cent this year. It has $405 million in assets but should be viewed as high risk.

If you want something safer, try GICs. Several small companies offer one-year terms of over 5 per cent according to ratehub.ca, with Motive Financial topping the list at 5.6 per cent. There are even a few five-year GICs in this range, led by EQ Bank at 5.1 per cent. But long-term yields are generally lower than short-term because of the inverted yield curve we’re currently experiencing.

Yields of 5 per cent and up are easy to find in the equity markets. You don’t have to look far — most interest sensitive stocks are offering yields at levels we’ve rarely seen. The following examples are my calculation based on current dividends and the closing price on July 28.

In the pipeline sector, TC Energy (TRP-T) is paying 8.2 per cent after the shares sold off last week in the aftermath of the sale of 40 per cent of its interest in Columbia Gas Transmission and Columbia Gulf Transmission pipelines, and the announcement that the company will split into two publicly-traded entities next year. The yield on Enbridge shares (ENB-T) is currently 7.4 per cent, while Pembina Pipeline (PPL-T) pays 6.5 per cent.

Utilities are in a similar situation. Emera (EMA-T) pays 5.1 per cent, Canadian Utilities (CU-T) offers 5.4 per cent, and Capital Power (CPX-T) is at 5.6 per cent. Industry leader Fortis (FTS-T) is an outlier at 4 per cent.

In the REIT sector, RioCan (REI.UN-T) yields a healthy 5.4 per cent. Choice Properties REIT (CHP.UN-T) is also at 5.4 per cent, with Primaris (PMZ.UN-T) at 6.2 per cent, and Slate Grocery REIT (SGR.UN-T) offering 8.5 per cent.

You can even find 5 per cent+ yields among the major banks, which is rare. Check out Bank of Nova Scotia (BNS-T), which yields 6.4 per cent. CIBC (CM-T) is also in this group at 6 per cent.

I’ve just scratched the surface here. There are many other stocks with yields of 5 per cent and up. If you want a portfolio with strong cash flow, they’re easy to find.

Perpetual preferred shares are another option. It’s easy to find yields of more than 6 per cent with high credit ratings from companies like Fortis (FTS.PR.F-T), Great West Life (GWO.PR.Y-T), and Intact Financial (IFC.PR.E-T).

I don’t think we’ll see yields in this range a year from now. Take advantage of them while you can.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe

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