Here are the options we've examined:
- High interest savings account - BMO's version (symbol: AAT770)
- Guaranteed Investment Certificates (GIC) - our biggest constraint here is to select only from GICs available from our discount broker BMO Investorline, ignoring a few that might have higher rates but which require going direct to the provider
- Corporate, federal and provincial government bonds as individual bonds and in target maturity ETFs, or traditional ever-renewing ETFs (we've included these evergreen ETFs despite lack of a hard maturity date as they have a defined and fairly constant term and duration - see this previous post comparing the ins and outs of fixed income alternatives)
- Preferred shares of individual companies (previous post here) - we have limited our choice to the few securities with a firm redemption date at which the investor gets back a specific principal amount and ignored the many other types of preferreds whose end date depends on the choice of the issuer
- Preferred shares of split share corporations (see posts here and here), with under-lying holdings of either a single company or multiple companies
The table below shows the best options across each type of security. Different individual GICs and corporate bonds were used to match up the maturities as closely as possible for each credit risk rating. Note that exact numbers shift constantly, making it necessary to double check the rate before buying, though the relationship and magnitude of the differences should be pretty close for a short while after this is posted. Green text shows the best rates.
The first thing we note is that a number of alternatives, shown in red text, at the short end of maturities, such as a high interest savings account, federal government Canada T-Bills or bonds and Province of Ontario bonds, don't even provide a return over the latest 1.3% annual inflation rate. The second thing we see is that there are some dramatic differences between alternatives with the very same credit risk e.g. the top paying 2 year GIC yields 2.11% while a Canada bond pays only 0.69%.
The table is quite busy so we have extracted the best rate for each maturity and created the chart below.
Up to 3 years maturity, ultra safe GICs, such as Equitable Bank or Manulife Bank, beat out just about everything. The exception is two split share corporation preferred shares, both from the same issuer - Partners Value Split Corp. Preferred Shares 4.95% Class AA Series I (BNA.PR.B) and Partners Value Split Corp. Preferred Shares 7.25% Class AA Series IV (BNA.PR.D). They have very high yields near 5%. Though their credit rating if Pfd-2 low, equivalent to BBB low for bonds, that is still considered investment grade (see Appendix B in this recent Raymond James report on preferred shares). BNA.PR.B and BNA.PR.D look like a very enticing option.
For maturities near 7 years and up to 10 years, corporate bond ETFs, notably BMO's Mid Corporate Bond Index ETF (ZCM), or individual bonds, such as the Great West Lifeco (AA low) 13Aug2020 maturity yielding 3.4% and the Bell Canada (A low) 11Sep2023 yielding 4.6%, become competitive to GICs.
It looks as though there is little benefit to buy very long maturities of 20 years or more as the yield is the same as for 10 years.
The final observation we make is that there is a much steeper increase in yield from 3 to 7 years maturity than at the short end of 1 to 3 years. Fixed income maturities of 5 to 10 years appear to be the best reward vs risk trade-off. If inflation heads back up to 3% or so, which is the top end of the Bank of Canada's target range and thus entirely reasonable to expect, at least the alternatives will keep pace and not lose real purchasing power.
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.