Has dividend investing met its match in the 5-per-cent GIC?
Rates of 5 per cent and even a bit better are available on guaranteed investment certificates from a wide variety of alternative banks and credit unions. Given that both banks and credit unions have deposit insurance plans, there is virtually no risk of losing money in a GIC.
Assume more – much more – risk to get a 5-per-cent yield from a dividend stock? Three reasons stand out for going this route: Potential for capital gains, the likelihood of dividend increases if you pick the right companies and tax benefits in non-registered accounts.
But the risks of dividend investing are not to be dismissed, a point that was recently driven home for shareholders of Algonquin Power and Utilities Corp. (AQN-T
ALGONQUIN POWER AND UTILITIES CORP
The price of safety with conventional GICs: No potential for capital appreciation, nor any growth in the amount of income you receive. Ironically, Algonquin has been a pretty good dividend growth story. Globeinvenstor shows the company generated five-year annualized dividend growth of 10 per cent, one of the better growth rates of stocks in the S&P/TSX 60 index of big blue chips.
One area of clear dividend superiority over GICs is after-tax returns in non-registered accounts. The dividend tax credit results in a lighter tax hit than on GIC interest, which is taxed as regular income. In practical terms, an Alberta resident making $150,000 per year would have a marginal tax rate of 20.5 per cent on corporate dividends and 38 per cent on regular income.
Some dividend stocks that look like a reasonable alternative to GICs right now include BCE Inc. (BCE-T
At one time, Algonquin would very likely have appeared on a list of blue chip dividend stocks that offered a challenge to GICs paying 5 per cent. Not today, though. The yield on AQN has soared to 9.6 per cent, which is too high for comfort.