Looking at Investment Returns

A major Canadian financial institution ran an investment promotion earlier this year that promised attractive returns for GIC-type investors, who needed higher returns to generate income. While dealing with an advisor from this particular institution on another matter, the conversation turned to the details of their offer.

The highlighted promotion offered a much higher monthly income than a normal payout GIC. The advisor confirmed that the product was a Term Certain Annuity for 15 years, linked to stock market index returns. He also confirmed that, at the end of the 15 years, the buyer may or may not get back their original capital, or nothing at all, depending on the performance of the economy and the stock markets.

The point of this story is to highlight one specific type of investment return that investors may receive as part of their RRSP, TFSA or other investment accounts. This is referred to as a ROC type investment or "return of capital". This special type of investment return is often noted on investment tax slips as part of any distributions distributed during the year; however, this return is never counted as earned income.

Other types of investment returns include taxable dividends (profit sharing), interest income (the most "tax-expensive" type of income for high income earners) and capital gains. When most people refer to their investment returns or goals, they often mean capital gains.

However, distributions of all types can form an important part of asset building and asset preservation strategies. Younger investors, who are usually more focused on growth, are advised to reinvest their dividends (DRIP or dividend reinvestment program) to buy more shares of units of an investment fund. This can result in capital gains as the value of each unit rises and the quantity increase in units over time, which may also increase the overall return of an investment portfolio. Either or both situations may result in a higher capital value of an investment over time.

As investors approach retirement and begin to consider their options for drawing income from their investments, it is possible to have all distributions paid out directly to the account owner rather than being reinvested. Ideally, this allows the investor to maintain the number of units owned while drawing out the desired income. An investor may also experience capital growth in the unit value over time as the economy grows, as well as possible growth in the distributions paid out for each unit owned.

There are two ways to look at the "yield" or ROI (Return on Investment) of a dividend paying investment. The first method is based on the original investment amount (or Book Value):

  • Capital Invested:   $10,000
  • Distributions:   $500 annually
  • Yield is:   5%

The yield will always remain at 5% as long as that investment is held, even if the investment value goes up or down over time.

The second method is based on current market value. Let us consider that, over five years, the capital value grew to $15,000. The dividend yield stays the same at $500:

  • Market Value:   $15,000
  • Distributions:   $500 annually
  • Yield is about:   3.34%

Someone might look at that new distribution yield and look for another investment that will pay out a higher amount of say 5%. However, it is always recommended to first confirm that actual dollars paid out by the new investment exceed the $500 currently being earned. Otherwise the tax costs, if any, and transaction costs may not be worth making a change.

Call us today to discuss to discuss your retirement and passive income cash flow needs. We have some exciting ideas that can help you meet your income targets!

Copyright © 2019 AdvisorNet Communications Inc., under license from W.F.I. All rights reserved. This article is provided for informational purposes only and is based on the perspectives and opinions of the owners and writers only. The information provided is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.

What our clients are saying...

  • When working with a financial planner our expectations are to maximize our investments and have a solid plan for retirement. We now have a greater awareness of our current portfolio and options to best protect our estate. We were provided with good information to use in order to make better investment and estate planning decisions. We would gladly recommend Anthony to our family and friends.

  • We value the personal service and detailed explanations we receive from Anthony on an ongoing basis. We feel comfortable recommending Anthony to our family and friends as he is someone who we can trust and has our best interests in mind. He has been great at helping us work towards a comfortable and manageable retirement.

  • The financial planning process we went through was clearly outlined and explained to me. I wanted to have a better understanding of my financial position and to know whether I could retire early or not.

    I am happy to recommend Anthony to my family and friends.

  • We valued having more options and new strategies in managing our finances up until retirement. Our expectations when working with a financial planner is to have someone who is very knowledgeable with investments and to work with someone who has the time to meet with us for intelligent discussions and provide alternatives for us to consider. Anthony definitely more then exceeded our expectations and we would be happy to recommend him to our family and friends.

  • We appreciate Anthony’s efficiency, his friendly demeanour and ability to listen to our concerns. We value his honesty and willingness to adhere to our wishes, with an understanding of possible implications and his commitment to explain any negative consequences accordingly. Anthony searched out new life insurance coverage as part of our estate planning. He was thorough and communicated each step in the process to us in a timely manner. We wanted someone who thoroughly understands the financial markets and can explain them in a comprehensible manner. We wanted to work with someone who can respond readily to our needs and who can provide proper advice. Anthony delivered on what he promised and definitely met our expectations. We would absolutely recommend Anthony to our family and friends.

  • I valued Anthony’s insight and recommendation for my investments. When working with a Financial planner I am looking for value and "best bang for my bucks". He was definitely able to meet my expectations and I would be glad to refer him to family, friends and work associates.