Prepare to become intimately familiar with the limits of deposit insurance if you’re a downsizing baby boomer.
I’ve heard lately from several people asking what to do with the money they’ve been left with after selling the family home. Some of these people have cash remaining after buying a smaller home and some are renting, at least temporarily. Whatever the origin of this cash, the goal is the same. Keep the money safe by holding it in a savings account protected by deposit insurance.
In a recent edition of the Carrick on Money newsletter, I discussed the case of a reader whose father was about to receive $500,000 in proceeds from the sale of his home and wanted to use the funds to live in a retirement home. This reader asked whether he needs to spread the money between multiple financial institutions to get full protection from Canada Deposit Insurance Corp.
I noted in my answer that you can have multiple accounts eligible for $100,000 of coverage each (note: that’s principal plus interest) at the same bank. For example, a tax-free savings account holding guaranteed investment certificates and a regular, non-registered savings account would each be covered. But it’s quite possible this reader’s father would need to have accounts at multiple banks to stay fully within CDIC limits.
Readers reminded me that there’s another option – use a credit union. Credit unions have their own provincial deposit-insurance plans and coverage limits can be higher than CDIC, even unlimited. For example, Ontario credit unions have a $250,000 limit, while Manitoba credit unions have unlimited coverage. Manitoba’s unlimited coverage is noteworthy because the province is home to several credit unions with online banking divisions offering excellent rates on savings accounts and term deposits.
Deposit-insurance plans have their differences, though. CDIC is a federal Crown corporation, while the Deposit Insurance Corp. of Ontario is a government agency. By contrast, the Deposit Guarantee Corp. of Manitoba is not part of the Manitoba government.
Downsizing boomers with hundreds of thousands of dollars to park do not have to subdivide their money to have it protected by deposit insurance. But they may want to anyway if they prefer deposit insurance with government backing, particularly the federal government.
-- Rob Carrick
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Ask Globe Investor
Question: I purchased CI Cambridge Global High Income Fund several months ago. The price of has not moved much during this time. I note the yield is about 3.41 per cent. I am wondering why this equity is called “high” income when the results I’ve seen are so modest. Do you still recommend this equity? Please note I have some very good returns on a number of your recommendations. I look forward to your comments.
Answer: I recommended this fund in one of my newsletters in April 2013 when it was priced at $13.29. At the time, it was named the Cambridge High Income Fund and invested mainly in Canadian securities. The annual payout was 72 cents per unit, for a yield of 5.4 per cent. Since then the word “Global” has been added to the title and the fund now holds over 40 per cent of its assets outside Canada. The NAV (net asset value) at the time of writing was $11.60, and the fund continues to pay out 6 cents per month, or 72 cents per year. At the current price, the yield is 6.2 per cent.
The higher yield looks attractive, but the problem is that the fund has not been able to generate enough profit to sustain it. As a result, we’ve seen a gradual erosion of the NAV in recent years in order to maintain the 6-cent monthly payout. Three years ago at this time, the NAV was $12.53.
As a result, total returns are less than the current yield because of the gradual decline in NAV. The five-year average annual compounded rate of return to the end of August was only 3.4 per cent.
This is a case in which the yield can be deceiving. We need to focus on total return, and it is underwhelming. My advice is to consult with your financial adviser about other options.
--Gordon Pape
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