Ways To Earn Investment Income: Part Two

In part one of this two part series I showed you how you can earn investment income from GIC’s and Bonds.  Now let’s take a look at several additional ways that you can earn investment income.

Dividends

Dividends are payments of after-tax profits from a corporation to its shareholders.  Shares in large reputable companies with proven records of good management, steady earnings and a long history of profitability and strong balance sheets are called blue chip.

Many Canadian blue-chip companies have had an uninterrupted record of dividend payments to their common shareholders since the early 1900’s.  Some examples are chartered banks and utilities.  Dividends are paid quarterly and in a low interest rate environment they can outpace the returns from bonds.

Monthly Income Funds

Most mutual fund companies offer Monthly Income Funds that are becoming increasingly popular, as more investors are making a steady, dependable cash flow a top priority.  They provide a consistent level of monthly income through dividends, interest and capital appreciation.

Some research is needed to make sure the objectives of the fund and the fund manager’s strategy is in line with your own objectives.  Check to see what the fund invests in.  Some focus on bonds and preferred shares, but others are heavily weighted in stocks.  You don’t want to be exposed to a high level of risk.

Look at distribution history for any variations in payments and make sure the distribution is sustainable or the Net Asset Value will be steadily eroded.

Real Estate Income Trusts

REIT’s are trusts where the primary source of income is real estate.  They are comprised of a variety of real estate assets such as multi-family housing, commercial or industrial centres and senior care facilities among others.

Net income is mainly generated from rents which ensures stable distributions to unitholders as well as possible capital appreciation from increased property values.

Preferred Shares

Preferred shares are complex equity investments that have characteristics of both bonds and common shares.  They are an income investment because dividends are generally paid to preferred shareholders every three months at a predetermined, fixed rate while also providing part ownership of a company.

Prices of preferred shares are usually not as volatile as the price of common shares and preferred shareholders rank ahead of common shareholders when it comes to dividend payments and claims on the company’s assets.  The trade-off is that preferred shareholders don’t usually have voting rights and the dividends paid generally don’t rise when the company prospers.

Choosing preferred shares is complicated by the variety of special attachments that are added to increase their attractiveness to investors – cumulative, redeemable, callable, retractable, convertible.  Good information can be found on James Hymas’ website.  I recommend you discuss your options with a knowledgeable financial professional.

Mortgage-Backed Securities

Mortgage-backed securities are pools of first residential mortgages that are guaranteed by CMHC.  They pay interest and repay a portion of your original principal monthly.  They are highly liquid and provide a level of safety equivalent to that of other government securities, often at higher yields.

Conclusion

When you build an income-producing portfolio, be sure to factor in taxes.  Interest is taxed at your highest marginal rate and dividends are given preferential tax treatment.  Take advantage of savings vehicles such as TFSA’s and RRSP’s so the income from the investments you’ve carefully selected is not eroded by taxes.

Related: How To Calculate Capital Gains Tax And Adjusted Cost Base

Keep your bond maturities to 5 years or less to take advantage of potentially higher future interest rates.  Ladder your GICs and bonds so all of your money doesn’t come due all at once.

So there you have it, a total of 7 ways to earn investment income.  How do they factor into your overall investment plan?