What the GIC critics get wrong

Even at rates of 4 to 5 per cent, GICs are disrespected.

Not so much by investors. The consulting firm McVay and Associates says balances in guaranteed investment certificates in the banking sector in June were 18.1 per cent higher than the same period last year.

It’s more advisers and market strategists who are finding fault with GICs, with several issues in mind. One is that the current inflation rate of 7.6 per cent exceeds GIC returns and leaves you with a negative rate of return.

True, but what doesn’t leave you with a negative real return these days? The S&P/TSX Composite Index was down 4 per cent for the year to date as of mid-week, and that includes dividends as well as share price changes. The FTSE Canada Universe Bond Index was down 11 per cent over the same time, and that includes bond interest as well as changes in bond prices. In light of these results, a guaranteed one-year return from a GIC sounds quite reasonable on a risk-reward basis.

If you lock in money for five years, you stand a very good chance of making a positive return after inflation. The Bank of Canada’s goal is to bring inflation down to previous levels around 2 per cent. If that happens in late 2023 or 2024, the latter years of your five-year GIC should deliver positive real rates of return. Note that the inflation rate has already fallen from 8.1 per cent in June.

A second criticism of GICs is that you can find comparable or better yields from dividend stocks, with potential for capital gains and better tax treatment in non-registered accounts. Quality dividend stocks also increase their payouts to shareholders each year, which gives you an added edge over GICs.

A compensating benefit for GICs is their guaranteed return, which is backstopped by either Canada Deposit Insurance Corp. or provincial credit union deposit insurance plans. At times like these, when even good dividend stocks are vulnerable to stock market pullbacks, the guarantee of a GIC offers value. That’s particularly true with a 5 per cent return, which was available from at least nine alternative banks and credit unions at mid-week.

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

Another knock on GICs is that in non-registered accounts, they generate interest that is taxed as regular income. Circumvent this disadvantage by using your tax-free savings account to hold GICs.

Prefer to use the tax-shielding benefits of TFSAs for higher growth investing? It’s worth noting that investment return guidelines for financial planners peg the long-term annualized total return for Canadian stocks at 6.3 per cent, and that’s before fees. GIC returns of 5 per cent for five years with no risk of losing money seem an acceptable compromise.

A criticism that’s harder for GICs to shake is terrible liquidity. Investors can sell cashable GICs easily before maturity, but returns are subpar. A possible solution: insurance company GICs, which offer cashability and somewhat competitive returns.

— Rob Carrick, personal finance columnist

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