Low interest rates pose challenges, investors may want to consider reducing debt - Nicola Wealth

Low interest rates pose challenges, investors may want to consider reducing debt


 

 
By Craig Wong, The Canadian Press

OTTAWA – With interest rates expected to stay low well into next year, experts say investors need to consider just how much risk they are comfortable with as they look for yield and weigh that against paying down debt before rates go higher.

Allan Hacking, a financial planner with Fundex Investments in Edmonton, says he always recommends paying down debt if you can.

“We think that should be priority No. 1 in most situations, especially in this environment,” he said.

“Everyone has a unique situation and their own needs, but definitely debt reduction should be at the forefront.”

Hacking said the savings for an investor who chooses to pay down debt instead of investing the money elsewhere are compounded after taxes are taken into consideration.

“It’s even better than a three per cent return because it is after-tax money. A three per cent rate of prime is really costing you around five per cent because you’re taxed first and then you use those after-tax dollars to pay down your debt,” he said.

And while a five per cent return may not turn any heads, it does compare well against the roughly eight per cent drop in the main index on the Toronto Stock Exchange for the year so far.

“It doesn’t sound that bad at all,” Hacking said.

Those with loans tied to their bank’s prime rate — such as lines of credit or variable rate mortgages — were given a reprieve in recent weeks as the Bank of Canada sounded a more dovish note toward raising interest rates.

Earlier this summer many economists had expected the central bank to look to start raising rates this fall, but with the turmoil in Europe and a statement by the U.S. Federal Reserve that it will look to keep rates low until 2013, expectations that the Bank of Canada will raise rates have been pushed out into next year at the earliest.

However, while those with loans might be pleased, for those investors looking for yield from their holdings, low interest rates means they will likely have to take on more risk to find the returns they want.

Real estate trusts, corporate debt and stocks paying a decent dividend are all places Rob Edel, chief investment officer at Vancouver-based Nicola Wealth Management, say investors will want to consider.

“In general, corporate balance sheets are in pretty decent shape and corporate earnings seem to be holding in pretty well,” Edel said.

“I’d also say there are some attractive dividend yields, particularly when you compare them with bond yields.”

But Edel says you always have to consider the risks involved with any investment.

If a dividend yield looks to good to be true, chances are there is a reason why, Edel said, pointing to Yellow Media, the telephone directory publisher and online directory company, as an example.

Shares in Yellow Media were hammered after the company cut its dividend and credit-rating agency DBRS downgraded its debt earlier this month.

“You can’t just chase returns because you want a certain return. You’ve got to look at the other side of it,” Edel said.

“I don’t think this is an environment that you want to be taking on a lot of risk.”

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