Inflation surreptitiously eats away at the value of your savings whether or not it is in a tax-deferred RRSP or TFSA. You cannot avoid it. Inflation has been at the lower end of the government's target range of 1 to 3%, coming in at 1.3% in 2009, but the average for the last 15 years or so has been the middle of the range at around 1.9%. It is Bank of Canada policy that inflation be 2%. If your annual return is anything below inflation, you are losing money in real terms, perhaps slowly, but nevertheless surely.
Leaving the money sitting as cash these days gets interest of 1% or so from major banks, even in a savings account (see rates on CANNEX).
CANNEX also provides a complete table of rates on offer in registered plans. Rates again are quite low. For locked-in GICs, you can get:
- 1-year: 0.4% from major banks, higher rates up to 2.1% from smaller institutions
- 5-year: 2% from the majors, maxing out at 3.6% from others
Returns on bonds include the interest and possible changes in capital value due to changes in default risk and interest rate risk. The longer the maturity, the greater the risk of interest rate increases. The examples below are investment grade bonds. Lower rated bonds will give off greater yields (see previous post Seeking Safety: Assessing Default Risk). An interesting choice is real return bonds of the Canadian government - the low yield is after inflation, in other words, the bond interest and capital is automatically adjusted upwards in line with increases in CPI, so the yield is protected from the ravages of inflation. A quick way to see a good sampling of current bonds and their yields is to go to this page on CanadianFixedIncome.ca.
Sample Yields as of February 2nd
- 2-year: 1.18%
- 5-year: 2.46%
- 10-year: 3.38%
- 20-year: 4.02%
- 17-year Real Return: 1.44%
- 4-year Ontario: 2.52%
- 8-year Quebec: 3.64%
- 10-year BC: 3.93%
- 5-year Royal Bank: 2.88%
- 19-year Bell Canada: 6.22%
- iShares CDN Government Bond Index Fund (symbol XGB): 2.85%
- BMO Canadian Government Bond Index ETF (ZGB): 2.59%
- Claymore 1-5Year Laddered Government Bond ETF (CLF): 1.8%
- BMO Aggregate Bond ETF (ZAG): 2.97%
- iShares CDN Corporate Bond ETF (XCB): 3.57%
For all types of bonds, get an exact price and yield online through the fixed income section of the brokerage website (the price you pay will be slightly higher and the yield will be slightly less than the CanadianFixed Income figure because the brokerage makes its revenue from the difference since there is no explicit trading commission charged). For less known or popular ones like real return bonds, it may be necessary to phone and speak to representatives at the fixed income desk.
There are many individual issues with varying returns, but the dividend yield of the following give an idea of the much more attractive returns available amongst preferreds. See Prefblog for much in-depth knowledgeable discussion of particular issues.
Many of the business trusts are being converted to straight corporations or being bought out but many others still remain and their distribution yield remains high (see 2009 post Income Trusts: a Neglected Opportunity?).
Though much or most of the return from equities should come from capital gains, the straight dividend yield of equities, as expressed in the general averages for major markets like Canada's TSX index and the USA's Total Market or S&P 500 remains reasonable. The chance of market declines is the ever-present risk, which investors know all too well.
- iShares CDN Composite Index Fund (XIC): 2.49%
- SPDR S&P 500 Index ETF (SPY): 2.0%
- iShares CDN S&P 500 Hedged to Canadian Dollars ETF (XSP): 1.59%
- Vanguard Total Stock Market ETF (VTI): 1.77%
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.