Hunting High and Low for Safe Yields

You can park your cash and earn little, or put it to work by paying down debt, writes John Heinzl, reporter and columnist for Globe Investor.

Government bonds are yielding next to nothing these days. If I want to earn some short-term income but don’t want to take additional risk, what other options do I have?

You’re right that Government of Canada bonds are paying peanuts. I checked with Bloomberg and anything with a term of two years or less is yielding under 1%. Ouch.

Even if you go out to a term of five years, the yield to maturity is an anemic 1.46%. In these uncertain economic times, you’re paying a steep price for safety.

But here’s the good news: You can do better than the five-year Canada bond yield—and avoid the possibility of capital loss should interest rates rise—with a high-interest savings account. ING Direct, for instance, is currently paying interest of 1.5%, and ResMor Trust Co.’s Ally account pays 2%.

Neither company charges fees or has a minimum balance, and both have the backing of the Canada Deposit Insurance Corp. for accounts up to $100,000, so your money is safe.

You can do even better at Hubert Financial, a division of Sunova Credit Union. Hubert’s Happy Savings Account currently pays interest of 2.5%, and deposits are guaranteed, without limit, by the Deposit Guarantee Corp. of Manitoba. There are no monthly fees and no minimum balance required, although you do have to invest in a $5 (refundable) share.

"For cash that you don’t plan to invest soon, I like the high-interest daily savings accounts," says Gail Bebee, personal finance speaker and author of No Hype: The Straight Goods on Investing Your Money. "I have an Ally account myself."

For cash sitting in your brokerage account, she recommends one of the many high-interest savings products that are bought and sold like mutual funds through your online broker. Examples include Altamira High-Interest Cash Performer, which currently pays 1.2%, and Manulife Trust Investment Savings Account, which pays 1.25%.

But be careful: I called my broker, BMO InvestorLine, to inquire about these funds and was told that I had to invest a minimum of $25,000.

Other brokers may have different rules. For example, RBC Direct Investing customers can park as little as $500 in the RBC Investment Savings Account, which pays 1.2% and has no fees or early redemption penalties.

Such accounts "pay a bit less than Ally et al ... but are very convenient," Bebee says.

If you’re willing to take on some additional risk, you can boost your yield with corporate bonds or bond exchange traded funds.

The iShares DEX All Corporate Bond Index Fund (Toronto: XCB), for example, invests in more than 400 high-quality corporate bonds, and has a weighted average yield to maturity of 3.04%. This is the annualized yield you would theoretically get if you held all the bonds until they matured, assuming all coupons were reinvested at the same yield.

But that’s before the management expense ratio of 0.42%, so your net yield would drop to about 2.6%. You’d also have to factor in brokerage commissions for buying and selling the ETF. And if corporate bond yields rise, the unit price of the ETF will fall.

If you’re seeking even higher yields, you could look into dividend-paying common shares such as BCE, Fortis, Emera, Enbridge, Telus or the big banks, Bebee says. But as we’ve seen recently, the money you make on dividends can quickly be wiped out by capital losses when the market goes for a nosedive. There is no such thing as a free lunch.

"I think there are a lot of people out there thinking they are going to find some magic yield somewhere," says Garth Rustand, executive director of the Investors-Aid Co-operative of Canada. But the reality is, if you want higher yields than those available from high-interest savings accounts, you have to accept some risk to your capital.

But there’s another option that can make a lot of sense for some people, he says: Using extra cash to pay down debt. If you’ve got a credit line or mortgage at, say, 4%, every dollar you apply against your loan will, in effect, earn a return of 4%.

And that’s an after-tax return. For someone in a 40% tax bracket, it would be equivalent to earning a pre-tax return of 6.67%—guaranteed. That looks pretty good compared to 1.5 or 2% on a savings account.

So before you start stressing about where to park your cash, consider paying down debt first.