Interest-bearing investments are mostly made in fixed-income securities such as bonds and interest-linked GICs (guaranteed investment certificates). Lower interest rates over the past decade have made it more difficult to generate income on fixed income securities. Even the slightest drop in interest rates can result in a significant drop in regular income.
In addition, there is rising inflation and its impact on purchasing power. “Inflation has been something that investors haven’t had to worry about for the past decade, but it will make the fixed income period more difficult than it has been for 40 years,” said Ben Gossack, vice president and director, portfolio manager, Fundamental Equity Team at TD Asset Management. “Inflation is that silent hand that pulls money out from under the mattress.”
Lower yields and inflation pose challenges for long-term investors
Investors need alternative ways to generate income
To offset lower yields and rising inflation, investors need to think about long-term growth. “Income is important, but also a growing stream of income,” says Gossack. “One way to do this is to build a nest egg, but that becomes more difficult as you get older.”
The market offers numerous investment alternatives to solve this income / growth dilemma, either through individual stocks or mutual funds. However, there are often compromises. For example, high-dividend stocks, utilities, and consumer staples provide income but not growth. Others, like growth stocks, offer growth but not a lot of income.
There are also many exchange traded funds (ETFs) that are designed for income or growth, but again, investors may have to compromise here. “The income solutions that the industry has provided through ETFs have typically been high-dividend-yielding stocks or covered call strategies where you are giving up future earnings potential today,” says Gossack.
TGED aims for stable monthly income plus long-term growth
The TD Active Global Enhanced Dividend ETF (TGED) is designed to ensure a stable monthly income with a focus on total return. Founded in May 2019, this differentiated ETF invests primarily in dividend-paying stocks in developed countries around the world and in some emerging markets.
“We are effectively trying to offer the individual a healthy income without sacrificing growth, and therefore aim for a high total return in the long term, which in the meantime includes a return of four percent,” says Gossack.
The fund takes an active stock picking approach and seeks high quality large cap companies that are free cash flow generating, have strong balance sheets and are ready to benefit from multiyear long term growth trends. “In addition, we are building up additional sources of income through active call writing and put writing,” says Gossack.