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Is it time for dividend investors to switch back to bonds?

It's a sign of how depressingly low bond yields were that, even after a huge rise in the past year, we're still not even close to a decent return.

Bond yields have shot up dramatically in the past 12 months, in large part because of expectations that the economic policies of Donald Trump will generate increased economic growth and inflation. The yield on the five-year Government of Canada bond, probably the bond maturity with the most impact on everyday people, has just about doubled over that period.

The five-year Canada bond yield was 0.59 per cent in mid-February 2016 and reached 1.23 per cent in mid-December before settling back to 1.18 per cent lately. This is a massive shift by bond market standards, but it does little to satisfy the hunger individual investors have for low-risk income.

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Inflation as of the last report from Statistics Canada was running at 1.6 per cent. So you're still losing money on an after-inflation basis if you loan your money to the federal government for five years at current rates. Guaranteed investment certificates offer only a token amount of relief.

You'd expect GIC rates to have edged up a bit in recent months because five-year mortgage rates have moved higher. Financial institutions may use money raised by issuing GICs to fund mortgages. But if you look at GIC rates in mid-February, they're kind of pathetic. A few credit unions are offering rates just above 2 per cent, but most other big bank alternatives are in the 1.5 to 2 per cent range. Some GIC issuers seem more interested in attracting one-year money. They're offering as much as 1.75 per cent to 2 per cent, which means there's little incentive to lock in for five years.

One way that rising bond yields have had an effect on investors is by driving down the price of individual bonds and bond funds or ETFs in their portfolio. Widely held bond funds were commonly down 2 to 3 per cent or so over the past six months. The offsetting benefit for investors is the opportunity to buy new bonds at today's higher yields. Unfortunately, higher is a relative term. We're still a ways from five-year bond yields that offer meaningful competition to blue chip dividend stocks.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More


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