The role of dividend-paying equities is to provide growth and a tax-advantaged income stream.
Dividends paid by Canadian corporations receive preferential tax treatment and can provide higher after-tax yields than bonds.
Growth in the underlying company may also lead to higher dividend payments over time to help offset inflation and to help ensure the money is there when you need it.
The role of corporate bonds within an income portfolio is to provide stability through diversification and access to higher yields than government bonds.
While investment-grade corporate bonds tend to behave similarly to government bonds, they do provide additional diversification through exposure to different companies and industries. Like government bonds, there is also potential for capital gains when interest rates fall.
Like their investment-grade corporate bond cousins, the role of high-yield bonds is to capture the higher yields available from loaning money to corporations.
High-yield bonds differ from corporate bonds since they tend to be issued by companies with less stable balance sheets. While there is a higher risk of default, a well-diversified portfolio of high-yield bonds may prove to be less volatile than equities while providing the benefits of diversification through exposure to different sectors of the economy.
Global bonds, much like corporate bonds, provide the benefits of diversification and access to higher yields.
Bonds issued by developing countries often pay higher yields than government bonds issued by developed market economies. They also provide additional diversification since you gain exposure to different currencies, geographic regions, and sectors that may behave differently at other times within an economic cycle.
Bond ladders play a unique role within a well-diversified income portfolio. They are designed to help maximize income while mitigating the negative effects of rising interest rates.
With rates at or near historic lows, future rate increases appear inevitable. When rates rise, the market value of many income-producing securities will fall. Because bond ladders consist of a selection of bonds with staggered maturities, the proceeds from a maturing bond can be reinvested at higher interest rates. Bonds may also be held to maturity if desired, protecting capital value.
If today’s low yields challenge your retirement plans, we are here to help.
Ensuring your portfolio includes exposure to these alternative income-producing asset classes can be critical to the success of a retirement income plan when entering the decumulation phase of your financial life. Talk to your Advisor and discover for yourself the benefits of investing in optimally diversified portfolios designed for a low-yield world.
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