Are some of you actually investing in GICs?
I actually have a small portion of my net worth in a GIC. Back in 2014 I had a RRSP GIC come due. Rather than put it to work in what I viewed as an overvalued stock market, I told my bank to put it back into a five-year GIC. Even if it did worse than the underlying market, I still didn’t hate the idea of having a little fixed income exposure.
I’m too lazy to look it up, but that GIC didn’t pay me a whole bunch of interest. It was probably locked in for just over 2% annually.
Say it was worth $10,000. After five years it would be worth just a hair over $11,000. That’s about as exciting as my favorite ride at the amusement park.
(It’s a bench, okay? The teacups make my tummy hurt :()
Let’s take a minute to compare that to one of the lamest (read: safest) stocks out there, Fortis (TSX:FTS).
The power of dividend growth
I could look back and compare Fortis shares to my potential GIC investment five years ago, but I don’t think that would be entirely accurate. After all, I know Fortis has done well. So instead we’ll look forward.
Interest rates have gone up a bit, so I’d be able to lock in my $11,000 investment into a five-year GIC paying 3.25%. Oh baby! I’ll be rich in no time!
Blog genies, insert a gif of somebody making it rain 20s at the club.
Okay, never mind.
THERE IT IS GUYS. I DID A .GIF.
Anyhoo, that GIC investment would be worth about $12,950 at the end of the next five years with zero chance of additional capital gains. If I was able to reinvest it at 3.25% it would generate $420.69 in annual income, which is pretty much the perfect number.
It’s actually $420.87, but like I’d want the truth to stand in the way of a good joke.
Now let’s compare that to an investment in Fortis, which currently yields 3.9%. After five years of dividend investment — which assumes no capital gain on the underlying price of the stock or dividend growth — I’d have $13,367. This investment would then spin off $521.31 in annual income.
It’s already better than a GIC. But it’s about to get a whole lot better.
Fortis has already told investors it plans to increase the dividend by 6% annually over the next five years. So we’re looking at payments of:
- Year 1: 3.9%
- Year 2 : 4.13%
- Year 3: 4.38%
- Year 4: 4.64%
- Year 5: 4.92%
You’re looking at about 27% more income in year five versus year one. That means that after five years you’d have an investment worth $13,638 and that spins off annual income of $711.
Remember, the GIC’s annual income stream is worth $420 after five years. You’d have 69% more income (GIGGITY) by sticking with the dividend growth path.
The other way
You don’t have to invest in dividend growth stocks to accomplish this. Any old dividend stock will do.
Let’s take a look at a stock I actually own, H&R REIT (TSX:HR.UN). It currently pays a 6.7% dividend with with very little dividend growth.
If I invest $11,000 into H&R REIT and automatically reinvest my dividends, after five years I’ll have an investment worth $15,268 assuming no capital gains on the stock. This investment would spit out passive income worth $1,022.95 on an annual basis.
Fortis pays a 3.9% dividend that should grow at 6% a year. H&R pays a 6.7% dividend that might not grow at all. But as long as I reinvest those H&R dividends I can create the same compounding effect. And since H&R’s current income starts out much higher than Fortis’s I can ensure it always stays ahead.
Remember, I don’t have to keep the investment in H&R (or Fortis), either. I can further diversify it into different stocks.
Basically, it comes down to this. Dividend growth is good. You should strive for it.
But remember, you don’t need to reinvest your dividends into the same stock to get the full impact. As long as they’re invested into something on a regular basis you’ll create the same compounding effect.