Money & Career

Make some extra cash in retirement

Author: Canadian Living

Money & Career

Make some extra cash in retirement

There was once a time when retirees could rely on strong returns to help get them through their golden years. Since the recession, though, the stock market has been crawling. The good old days, when six to eight per cent returns were the norm, are over. To get some additional cash, retirees now have to invest in income-producing products such as dividend investments or high-yield bonds. Here we explain the different options retirees have and what they need to watch out for.

Buy: Dividend-paying companies
One of the best ways to get income these days is to invest in large, blue-chip dividend-paying companies, such as Coca-Cola or Bell Canada. With so many people running from the markets, these corporations want your investment dollars and they're willing to pay for them. Many of these companies pay out better annual yields -- usually in quarterly installments -- than what you'll get from lower-paying government bonds. Even if the stock falls, the payment should continue.

Warning: Make sure your dividends aren't cut
The worst thing that can happen to an investor who relies on dividend income is to have a payout cut. This can happen if the company can't afford the payment anymore because it's taken on too much debt or is spending too much money on other things. It's best to stick to a large company that sells things everyone needs, regardless of economic condition, so there's less change of it getting into financial trouble. Bell Canada, for instance, sells Internet and TV services -- even if times are tough it's unlikely people will abandon their favourite shows, which means the money will keep rolling in.

To help determine if the company will cut its dividend or not, it's a good idea to look at how many times the payout has been increased over the years. Experts like to see the payment go up annually. Regularly increasing dividends are a sign of strength and commitment to investors. 

Buy: High-yield bonds
Some investors are turning to higher-yielding corporate bonds, which, depending on the bond, can pay one or two per cent more than government bonds. Corporate bonds are functionally just like government ones, except you're dealing with a business. You “lend” money to the corporation in exchange for interest earnings. Hold the bond to maturity and you get all your money back. The yields are higher because owning corporate debt is riskier; it's unlikely a government will default, but a poorly run corporation could.

Warning: Don't buy duds
Corporate bonds come with a rating determined by various rating agencies. The higher the rating -- AAA is the best; D is the worst -- the better. There's no problem with wanting a little extra income, but don't be so profit-hungry you ignore big risks. Stick to the higher-rated corporates -- BBB+ or above -- so you don't have to worry too much about your investment going bust. D companies are already in default, so unless you're the savviest of investors, stay away.

Investors do have some other options available to them. Long-term government bonds pay a higher yield than short-term, but interest rate risk -- if rates go up, and they will eventually, bond prices typically fall -- makes 10- to 30-year bonds a less attractive investment.

Also, don't buy companies that pay too high a yield. That signals that a company's dividend may be unsustainable, or the stock price is tanking. Do your due diligence, pick the right investments, and you should be able to make a little bit of extra dough in retirement.


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Money & Career

Make some extra cash in retirement