Where I’d Seek Income as Bonds Finally Pay Again

Stocks may be the best investment to own for incredibly long periods of time, and while dividend stocks may be more bountiful and rewarding than bonds, I still think that there ought to be a spot reserved in your portfolio for those safety assets.

Of course, if you’re a new investor with decades to invest, you’re probably going to want to stick with stocks and minimal, if any, bonds. At the same time, there are also younger investors who expect a hefty tab to come due within a year or so. That’s not a long enough time horizon, in my view, to warrant taking on risks with various equities.

Those who can’t afford to take on risk (maybe there’s tuition coming due or something else entirely) may wish to park cash in a more conservative corner of the market. With GICs (Guaranteed Investment Certificates) paying very little these days (you’d be lucky to find one with a 3% rate on a term close to 12–18 months).

Bond ETFs look enticing for the risk-averse

Either way, I think bonds, or more specifically, bond ETFs, stand out as a better place to be on a relative basis, not just given added liquidity over locked-in GICs, but because the rates have actually become somewhat decent in recent years. In any case, if rates continue to move lower from here, bond ETFs might actually be able to deliver a bit of capital gains as well.

For now, though, I think the Bank of Canada might need to consider tightening up a bit before continuing ahead with more rate cuts, especially considering how high food inflation, which has risen above 7% as of January, has become.

Though a change of course could produce a better buying opportunity for some bond ETFs, I’m also not against dollar-cost averaging (DCA) into a fixed-income ETF over time. Do remember that every month you don’t invest and park cash in savings means coupons that aren’t coming your way.

The VAB stands out as an efficient safety play

I think the Vanguard Canadian Aggregate Bond Index ETF (TSX:VAB) might be an interesting option, especially for longer-term investors who believe that AI will cause rates to stay lower for a longer duration. Perhaps one rate hike or two from the Bank of Canada could be an outlier rather than the start of a trend.

In any case, the VAB pays a 3.3% yield, which is quite a bit higher than that of the TSX Index (more than 1%). While the VAB could be a drag on returns if the bull market in Canada continues higher, I’m certainly not against a diversified bond ETF, with a range of durations and a good mix between government and corporate bonds.

Perhaps the biggest reason to go down the Vanguard ETF route, though, is the low 0.09% MER (management expense ratio). It doesn’t cost much to beef up the conservative part of your portfolio. For investors looking for added stability and decent passive income, it’s tough to top the VAB, especially if you’re looking to take risk off the table for the year.

The post Where I’d Seek Income as Bonds Finally Pay Again appeared first on The Motley Fool Canada.

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More reading

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.