A Comment -- General Comments From an Expert (A Commentary)

Laddered GICs: He is in favour of them if you have limited access to bonds. You don’t pay a premium to buy them like corporate bonds. They are safe to $120,000 up to 5 years due to insurance (so use 5 year ladders). They are for people who are not willing to put their capital at risk. It is a dangerous time to reach for yield right now with corporate bonds. You get the most principle risk.

GICs: Illiquid – you can’t trade them. It comes down to relative yield. Prefers 1 to 10 year ladder. There is a place for them and they are safe.

Reliance LP 4.574% maturing March 15/17. (Top Pick May 6/13, Up 4.41%)

Real Return Bonds Maturing 2026: Low coupon and long duration. The principle is linked to CPI and interest is based on changing principle amount. Not the right time to be buying them because you only get 0.7% above inflation. He recommends getting out of them now because they are performing a little better this year. These have a lot of downside risk to them.

Call date gives company a right to purchase the bond back before it matures. Usually involves a premium. They can call it any time after that date.

Preferreds (vs. Common Shares). A lot of anomalies will be normalized in future years between the two. There should cease to be the narrow spread between common and preferreds. Stick with really high quality ones and with rate reset varieties. Not a good time to buy perpetual preferreds. Common stocks are better relative value.

1-30 year ladder. Doesn’t do those on a ladder. There aren’t always enough years represented. He does 5-10 year ladders.

Strip Bonds: Take a 10 year bond. To strip it is to discount it to its present value and remove the interest. Attractive for financial planning and no interest payments. Fully compounding. They lost their appeal with low interest rates. Stick to provincial strips. No more than 10 years. You can do a ladder, perhaps with GICs in the front end.

Commercial Mortgage Backed Securities. He is not a fan. Prefers the ones backed by the government. Got us into the mess in the financial crisis.

Bond ETFs and Risk. Bond ETFs are riskier because you don’t own the actual security. There could be tracking errors because you can’t buy all the bonds. There is not enough supply for some of the ETFs to buy them.

Bonds make almost no sense for a taxable investor. You get your principle back with almost no return after tax.

Markets. ‘Sell in May and go away’ – you should have sold in February. He is cautious because the market continues to go higher. Economic data is good out there: jobs; housing to a certain disagree. The bond market is telling us a different story. Bond investors are saying ‘flock to safety’. There is not a lot of volume for the markets grinding higher. He is worried about the complacency in the markets. He is cautions that if you made some money, you should take some profits. But you should still have some equity exposure.

Solar Related Stock? Solar is not an area for him because it does not produce a consistent dividend. Think of dirty energy. Coal will give way to wind and solar. Likes Algonquin Power or Northland Power for solar exposure. This is playing solar in a more riskless manor.

Interest Rates. The most recent interest-rate move, downwards, continues to confound him. There was a run this time last year, when the feds started talking more aggressively about their exit strategy and economic indications were picking up. Doesn’t feel people believe in the slow growth economy yet. The 10 year bond level moved from 3% down to the low 2%’s. He continues to look at dividend paying stocks that are yielding about 4%, and feels they look very attractive. In 2008, a lot of pension funds were caught overweight in equities. Over the last couple of years, there has been a tremendous rise in equities, especially in the US. He has seen more disciplined profit taking coming out of some of those plans, and funnelling some of it back into bonds. Confident we will continue to see a rotation out of bonds, and into stocks longer-term. Looking at demographics and the baby boom population, there is a need for a combination of income, to fund current lifestyle and a little capital growth. The only place to get this combination of income and growth is in equities, specifically dividend paying equities. 5% dividend growth looks pretty good now, especially when 10 year bonds are less than half of that.

Markets. If you want to achieve double-digit returns, your best bet is to find and own companies that can grow their earnings per share at a 15%-20% annual growth rate, year after year after year. These kinds of stocks are typically more volatile and most investors do not like volatility. Advantage for a “do-it-yourself” investor who spends a lot of time to get to know a company and understand what it’s doing, is that if you know what you own, you can better tolerate the volatility and therefore have a better return potential.