The new road to yield

Saving for your post-career years used to be a piece of cake. Government bonds offered yields of 8% to 9% with virtually no risk, which for many meant smooth sailing into their golden years.

But those days are gone. A 10-year government bond now offers less than 2%, which means your portfolio will shrink fast if you’re taking out 4% to 5% per year. Compounding the problem is an otherwise welcome development: you’re likely to live longer.

It’s a perfect storm: portfolios need to last longer but traditional investments aren’t always supporting the necessary income streams. This means if you want to reach your retirement goals, you need to find other sources of yield.

That bumps up your risk level, but it’s not as bad as you might think. There are plenty of yield-generating tools that will help you reach your financial goals with a moderate level of risk.

Here are some options:

REITs

There’s a good chance the mall you shop at is owned by a Real Estate Investment Trust (REIT). These vehicles allow you to participate in ownership of real estate assets you otherwise wouldn’t be able to access; and they offer consistent, reliable yield with risk profiles that are well below typical stocks.

Publicly traded REITs can be bought and sold on a stock exchange, while private REITs are off-exchange vehicles that typically require a longer-term commitment. Private REITs may pay yearly distributions in the area of 8% to 9%, while publicly traded REITs usually pay a couple percent less. A big bonus is REITs protect you against inflation and generally have low volatility.

Mortgage Investment Corporations (MICs)

Banks control about 90% of the Canadian mortgage market. Mortgage Investment Corporations (MICs) underwrite and bundle a portion of the remaining 10%.

They extend loans to high-quality borrowers for larger residential development projects, like luxury homes situated around private golf courses, or row houses on large urban lots.

MICs offer capital preservation and consistent yields at risks levels well below those of most stocks. Like REITs, some MICs are publicly traded while others are private offerings. Yields are similar, too: TSX-listed MICs have historically offered around 6%, while private MICs have been in the area of 8%.

Corporate Bonds

Companies need capital to fund expansions and other business objectives, and one way they get it is to issue bonds.

Just like governments, companies borrow money from investors and pay interest. Since even the most well-established and stable companies are not as immune to default as most developed-nation governments, their bonds have a slightly elevated level of risk.

But that means better yields. In most cases, retail investors can’t directly access corporate bonds. But you can still own them through mutual funds.

Floating Rate Notes

Bonds are sensitive to interest rate increases if you don’t hold them to maturity. If rates go up, your bond’s value declines.

Say you have a $1,000 bond with a 4% interest rate at the time of purchase. If rates go to 6% and you want to sell, you have to give the buyer that rate. After all, why should she take your 4% when she can get 6% elsewhere for the same money? This means some of your principal will need to cover that extra 2%, so you lose money.

Floating rate notes are bonds designed to protect investors from anticipated rate increases.

The coupons they pay fluctuate with a benchmark, which can be the U.S. T-bill rate, the Canadian Dealer Offered Rate or other reference rate. As with other debt instruments, these investments have varying degrees of credit risk.

Dividend-Paying Blue Chip Stocks

Not all stocks are created equal. Some look like they’re bouncing on a trampoline, falling as quickly as they rise—not what you want once you’ve left the workforce.

Others have a much different, far more stable, profile.

Blue-chip stocks are stakes in well-established businesses that lead their industries. They have less volatility than most stocks and their preferred, and some classes of common, shares pay a steady dividend that in many cases grows over time.

Plus, this income is tax-advantaged. So, for only a slightly elevated level of risk you get a stable, income-generating investment that the taxman isn’t too harsh with.