What the Algonquin Power debacle says about dividend stocks versus GICs

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 has been a go-to dividend stock for a while, but disappointing third-quarter financial results have left the shares down roughly 34 per cent in just five days. You never have to worry about a GIC falling in value because you’re guaranteed to get your initial investment back, plus interest.

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 TC Energy Corp. (trp-T), Manulife Financial Corp. (MFC-T , Pembina Pipeline Corp. (PPL-T and Telus Corp. (T-T . Each offers a dividend in the 4.8 to 5.9 -per-cent range, a rising dividend over the past five years and 12-month declines no worse than 8.7 per cent as of mid-November. For comparison, AQN was down about 44 per cent over that period.

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.

Photo by Jan Huber on Unsplash