What week is this?

Well, it has been about 14 months since my last post.

In financial markets, one could say that not much has changed. Europe is still mired in debt, with seemingly a new country every month entering the headlines. The latest is Spain, who this past weekend announced that they would be receiving up to 100 billion Euros to bail out their banks. It is ugly.

Back in Canada, things look somewhat better. As the expression goes, if the US sneezes, then we get a cold. Well, it seems like the endless sneezing fits of the US are finally subsiding. Their housing market has actually improved lately for the first time in years. This is a positive because it means people will be less reluctant to walk away on a mortgage if their house has real value. Unemployment has also been on the decline. It seems that they are even seeing some manufacturing jobs return home after spending a long time overseas.

The one area of the investment world that continues to skyrocket upwards is the fixed income universe. The yield on the 10-year Canada bond is now well below 2% (remember, since the coupons on bonds are a fixed dollar amount, the yield will go down as the price of bonds goes up). It seems people have been burned so consistently by their stocks that they just want the safety of something that won't go down. Even though to buy it today means only getting 2% return on your money. But if you factor in inflation (i.e. the purchasing power of $1), the real return on your money is probably going to be close to 0% per year.

So if you are looking toward your investments for income, where do you turn? I believe the answer lies in owning a diversified portfolio of dividend-paying common stock. It is still possible to buy high-quality Canadian companies that will pay you over 4% in dividends each year. Yes, you will be subject to the ups and downs of the daily market but at the end of the day, you will get paid. Even as we speak, 4 of the 5 large Canadian banks have dividends that are at least 4% of their share price (the only exception being TD, at 3.7%). Compare that to bonds and you are getting almost a 100% raise in income... not to mention paying about 1/2 as much tax! It is a no-brainer.

If you do decide to stick with bonds in your portfolio, then keep them short-term. You don't want to be holding bonds that mature in 20 years and have interest rates start to rise. Why would anyone want to buy your bond that pays 2% when new ones are coming out that pay 4%? And guess what that will do to the price of your bond... not good. This is called interest rate risk and it is something that we haven't had to consider in Canada for almost 30 years. But it is real and it does cause bond prices to fall (sometimes dramatically) in value.

Anyway, it is good to be back blogging. I'll try to make my next update sooner than 14 months from now.

Thanks for reading.