February 12, 2018

On Monday, the S&P 500 was up 1.4% and Toronto was up the same amount.

In part this was due to Trump releasing details of an infrastructure subsidy plan.

The plan seemed to get mixed reviews with some pointing out that the $200 billion is over ten years and that the spending will be funded with yet more debt. Of course EVERYTHING Trumps does or says gets mixed reviews these days in a world where the various media outlets appear to be taking sides.

In other news Trump says he will soon announce new duties on countries that he feels are not practicing fair trade. A trade war is not exactly good news for the markets.

Most of the stocks on our list were up today. Perhaps that indicates that buying near the lows last week will turn out to have been a good move for those who did so.

Looking for Yield

I notice TD Direct is out with an issue of 6.75% convertible debentures from Just Energy. I know a little bit about the company but I don’t know how safe these debentures are. The conversion price is $8.90 while the shares closed today up 8.5% at $6.15.

Investors who are more confident that the shares will rise past $8.90 would be better off to simply invest in the common shares rather than the convertible. The commons shares have a dividend yield of 9.9%.

I was about to say that the 6.75% yield seemed attractive but now that I am reminded of the high dividend on the stock I would choose the stock instead. I am not putting a rating on this but I would say that given the high yield the view of the market is that the Just Energy shares (and the convertibles to a lesser extent) are a speculative investment.

On my Links page I had a link to the Financial Post Market data which used to include a list of convertible dentures. That link no longer works.

As far as high yield debt, TD Direct has nothing that looks particularly appealing to me. They have some Sherrit International  issues yielding over 10% for maturities around 3.5 to 7 years. But Sherrit has been a very weak company for many years and I am not sure it is worth the risk. There are also a couple of energy companies yielding over 7% to maturity. There is also a Bombardier issue yielding over 7%. Given the difficulty of assessing the credit worthiness of what are by definition weak companies (hence high yield), I would look instead to a high yield ETF to gain diversity.

However, I have not found anything overly attractive in that area either. ishares offers two that invest mostly in the U.S. but are hedged to Canadian dollars. XYH has a yield of 5.6%. CHB yield 5.8%. Looking at Vanguard, they do not appear to offer a Canadian high yield ETF.

ishares also offers XHB which is Canadian bonds with somewhat lower credit but it yields only a little over 4% which does not seem attractive.

A knock against bond ETFs is that they never mature. But I believe the cash flows (after the fees) are the same as a laddered portfolio of individual bonds which in effect never really matures either. Basically I think this “never matures” criticism of bonds ETFs is not a valid criticism. It has some truth to it but does not seem to be a valid reason to avoid bond ETF. I avoid investing in bond ETFs because of the low yields not because they never mature.