What the GIC critics are wrong

Even at rates of 4-5%, GICs are not respected.

Not so much by investors. Consulting firm McVay and Associates says guaranteed investment certificate balances in the banking sector in June were 18.1% higher than the same period last year.

It’s more market advisors and strategists who criticize GICs, with several issues in mind. First, the current inflation rate of 7.6% exceeds GIC returns and leaves you with a negative rate of return.

That’s true, but what’s not leaving you with a negative real return these days? The S&P/TSX Composite Index was down 4% year-to-date mid-week, and that includes dividends as well as stock price changes. The FTSE Canada Universe Bond Index is down 11% over the same period, and that includes bond interest as well as bond price changes. In light of these results, a one-year guaranteed return on a GIC seems quite reasonable on a risk-reward basis.

If you set aside money for five years, you have a very good chance of earning a positive return after inflation. The Bank of Canada’s objective is to bring inflation back to previous levels of around 2%. If this happens at the end of 2023 or 2024, the later years of your five-year GIC should offer positive real rates of return. Note that the inflation rate has already fallen by 8.1 percent in June.

A second criticism of GICs is that you can find comparable or better returns from dividend-paying stocks, with potential for capital gains and better tax treatment in non-registered accounts. Quality dividend stocks also increase their shareholder payouts each year, giving you an added advantage over GICs.

A compensating advantage for GICs is their guaranteed return, which is backed by either the Canada Deposit Insurance Corporation or provincial credit union deposit insurance plans. At times like these, when even good dividend-paying stocks are vulnerable to stock market downturns, the guarantee of a GIC offers value. This is especially true with a 5% yield, which was available from at least nine alternative banks and credit unions mid-week.

One name not on this list is Oaken Financial, which led the market by offering 5% for five years in late June. Oaken this week cut its five-year rate to 4.65%, while raising short-term rates.

Another impact on GICs is that, in non-registered accounts, they earn interest which is taxed as regular income. Work around this inconvenience by using your tax-free savings account to hold GICs.

Prefer to use the tax advantages of TFSAs to invest in higher growth? Note that the investment return guidelines for financial planners peg the long-term annualized total return for Canadian equities at 6.3%, before fees. GIC returns of 5% for five years with no risk of losing money seem like an acceptable compromise.

A harder criticism for GICs to shake is the terrible liquidity. Investors can easily sell cashable GICs before maturity, but the returns are below average. One possible solution: GICs from insurance companies, which offer somewhat competitive cashability and yields.

— Rob Carrick, personal finance columnist

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