Canadians invest for the future. Setting money aside is a fundamental strategy to ensure the standard of living you are enjoying today will last throughout your lifetime – especially during the golden years of retirement. And those years are stretching: a Canadian who reaches 65 now has a 50 percent chance of living to age 90. Given this longer life expectancy, holding on to your nest egg is more important than ever. Most savers are understandably reluctant to liquidate assets they have accumulated over the years. Instead, they look to income-generating investments to live off the cash flow and protect the principal for later years.
This has created a demand for income, driven by the three Ds: demographics, deleveraging and de-risking. We’re getting older. We’re paying off our debt. And we’re getting more conservative. That, in a nutshell, is why the appetite for income is so strong.
A recent white paper study reveals that focusing solely on yield is a trap to avoid when looking at income products. The study grouped the top segment of the income product market each year into three baskets: highest yield, highest earnings growth, and highest dividend per share growth. By measuring the total return for these baskets, the research found that seeking high dividend growth was the most successful strategy on both an absolute and risk-adjusted basis. The highest-yield seeking strategy didn’t fare as well and was punished more often than the other two. This research demonstrates that not all income strategies are created equal.
Smart investing requires a prudent approach to navigating the ever-expanding sea of income options. Every market cycle comes with a flood of suppliers looking to profit quickly by swamping the market with products. When investors understand income investing better it helps them avoid the dangers of focusing on yield alone, and to focus on appropriate income products that suit their needs as they enter retirement.