The goal of all investors is to stretch their savings in retirement for as long as possible.
But the strategy used to save and accumulate money during working years is different than the strategy used once you retire and are spending the money.
That was the message Harvest Portfolios Group’s Managing Director David Wysocki delivered as part of a panel at the Sixth Annual ETF Conference last week. Harvest was a sponsor of the event co-hosted by the Canadian ETF Association and Mindpath. The event was an opportunity for financial advisors to meet, exchange ideas and catch up on developments in the industry. The panel’s discussion was about the challenges of generating income in a low interest rate world and how to increase your client’s returns using various income producing ETFs.
David Wysocki, Managing Director, Harvest ETFs joined us for an enlightening chat at the CETFA Mindpath Conference.
Mr. Wysocki focused on equity products including explanations of how Harvest ETFs can help. He said understanding the differences between a saving strategy during working years (accumulation) and generating cash in retirement (decumulation) are important.
Adapting your approach will create a less stressful and secure retirement. In this era of low interest rates, after inflation and taxes, many fixed income investments are a break-even proposition at best, he said.
For example, 30 years ago you could buy a GIC, or a 30-year bond, and get an 8% to 10% interest rate. So, $1 million was generating $80,000 to $100,000 a year. Today, GICs are yielding 1.6%, so that million dollars is yielding $16,000 a year. When you adjust for inflation the real return becomes that much smaller.
That means looking elsewhere for returns, he said. This includes owning stocks in global brand leaders. These companies have strong businesses that continue to perform in downturns while paying dividends.
Mr. Wysocki said one risk retirees face is that the timing of their withdrawals coincides with a down market. The withdrawals eat into capital and are hard to rebuild. As an example, he said a 30% per cent drop in the stock market, followed by a 30% gain still leaves you 9% lower than before the drop.
A strategy to reduce the impact of market swings is to build a diversified portfolio that protects against this risk through high quality, brand-leading multinationals. Harvest focuses on these companies, who have strong cash flow and strong balance sheets and a commitment to dividend growth. Harvest combines that with a covered call strategy that generates additional cash and reduces volatility.
Covered call options are a widely accepted strategy in today’s world of low interest rates as a way to safely generate more income, he said. They help generate additional cash flow and reduces volatility.
In simple terms, the owner of the shares sells a portion of the potential rise in stock price in exchange for a fee. The fee limits the gain a bit, but it also acts as a cushion if share prices fall, because you keep the fee no matter what. Covered call options are a Harvest specialty.
For investors who are cash flow oriented, the reduction of volatility and enhanced income are ideal solutions, he said.
“There is always a reason not to invest in equities and currently the wall of worry is high. But at Harvest, we look at that wall as an opportunity,” Mr. Wysocki said.
Mr. Wysocki noted that the Harvest Brand Leaders Plus Income ETF (TSX: HBF, HBF.U) invests in the world’s largest brand leaders.
As of Oct. 31, 2019, the actively managed ETF held 20 global brand leaders who are part of the dividend elite, with an average portfolio dividend yield of 2.00% and a current distribution yield of 6.93%. Distributions are paid monthly and are payable as cash or through a Distribution Reinvestment Plan (DRIP). The ETF’s management fee is 0.75%.
Many of today’s tech leaders can be found in the Harvest Tech Achievers Growth & Income ETF (TSX:HTA, HTA.U).
As of Oct. 31, 2019, the ETF held a portfolio of 20 global technology leaders with an average dividend yield of 1.2% and a current distribution yield of 6.64%. Distributions are paid monthly and are payable as cash or through a Distribution Reinvestment Plan (DRIP). The ETF’s management fee is 0.85%.
The idea behind the ETFs is to invest in sectors or themes that have long-term growth, with leading companies, who pay dividends that grow over time, he said.
The above article is for information purposes only and is not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.