Entries from December 2011 ↓

Before that irritating holiday interruptus, this pathetic blog dropped the names of a few yieldy assets. Hope you were paying attention. This is what 2012 will be all about.

No, there will not be an economic apocalypse next year. No 2008 rerun or Lehman II. But markets will be volatile, choppy and dramatically unpredictable even though they’ll end the year higher. Perhaps arrestingly. In any case, your mutual funds will likely flounder and your equities flail. More than ever, income will be critical, especially for all the wrinkly people this site so loves to torment.

Next year, your first love should be liquidity. Financial assets will outperform real ones, including precious metals and certainly real estate. It could be the last period in which people talk about lost years in America, imminent collapse in Europe or global reckoning. A year from now I’d bet we’re all in a much better frame of mind, except for those who still have their net worth locked in illiquid bricks and mortar.

So if you don’t own assets that (a) are instantly convertible into cash, (b) far less volatile than stocks, (c) not correlated to equity markets and (d) pay you to own them, it’s time to start getting some. This is why I’m hot on preferreds, for example, which all this year paid their owners a yield of 5% or better, let them collect the dividend tax credit (and pay 80% less than with a GIC), and remained rock solid in value even as stocks soared and melted.

Of course, you need to get the right kind of preferreds, issued by the right companies. Personally I like perpetuals with fixed dividends, which just keep churning out tax-efficient income. And if they’re ever recalled (an unusual event) by the issuer, you’ll probably get a capital gain to boot. The risk is a sharp rise in interest rates, which would lower the capital value but not affect the payments. The odds of that happening are slim, but if it does take place, preferreds will cost less and I’ll be backing the Hummer up at the loading dock.

But this isn’t about preferred shares. If you want, I will devote an entire, sensuous, throbbing post to that topic. But not today. So keep your pants on and let’s talk about REITs.

Besides preferreds (and bonds, and exchange-traded funds), every 2012 portfolio should include real estate investment trusts. I’ve already given you the names and recent yields of a number of the top contenders, which coughed up yields of 6-12% this year, when most investors needed a magic touch just to break even. There’s every reason to believe this will continue.

To counter the idiot comments about to be written, remember that REITs do not buy houses, strip malls in Red Deer or triplexes in Etobicoke. They’ll be largely unaffected by any major correction in residential real estate values. Instead, they gobble office towers and complexes, sprawling suburban malls, chains of retirement homes or tens of thousands of rental apartment units. As such, REITs are all about one thing. Cash flow. They buy income-producing real estate using the usual leverage, collect rents and distribute cash to unitholders.

Last year major Canadian REITs jumped in value as group by almost 20%, and at the same time spit out an average yield of 5.5%. Over the last decade they’ve doubled the performance of the TSX, and trumped the increase in house prices by an even wider margin.

Unlike owning an actual piece of real estate, REITs are totally liquid. Most trade on equity markets and can be bought or sold with a call or a click. Unlike your investment condo, you know exactly the price of your REIT every hour. When you buy or sell, there may be a trade fee of a few bucks. When you unload your $300,000 condo, it’ll probably cost you $15,000.

You don’t need to get a mortgage to buy REITs, purchase mortgage insurance, try to find a tenant who won’t glue tin foil to the windows, or struggle with negative cash flow. There’s no property insurance to buy or land transfer tax to pay. No painting. No toilet floats.

REITs are cash flow positive and pay regular distributions. You don’t need to hire a realtor, suffer through showings or have morons walk through your asset in order to sell it. In fact, you can even buy an exchange-traded fund which owns a mess of REITs (XRE), giving massive diversification across everything from hotels to bank towers.

There are risks (as always), but they pale in comparison with buying a condo in Toronto or Vancouver, especially one yet to be built. Financial markets could start selling off, taking REITs with them. But unlike in a real estate correction – when you might wait months (or years) to unload your property – trust units can be sold immediately with the cash hitting your account in three days.

But the greatest difference between real estate and real estate trusts is this: properties cost you, while REITs pay you.

Why would you not want to own this stuff?

Especially with what’s coming.

He’s 24 and lives in the basement with an iguana. With two degrees he refuses to stock tomatoes in the local Loblaws, since that’s not exactly what $34,000 in student debt was for. Besides, why should he? Mom upstairs cooks his meals, suds his jeans and pays the mortgage. Dad, on the other hand, is a hard ass. Boomer men. When does the damn testo give out?

Mark has a plan. He’s decided to take more courses. And hope he doesn’t get his butt thrown out the door, at least not before borrowing enough from his mom for the downpayment on a condo.

If you witnessed some intergenerational angst over the holidays, join the club. It’s now endemic, as it is in my extended family. Adult Boomer children hanging around like a virus, often endured, if not nurtured by Mom, while Dad looks at a scary economic landscape and wonders how the hell to finance a looming retirement, let alone carry the offspring.

Seems like a phenom. School’s over. Puberty’s but a memory. But no job, no immediate prospects and no appetite to move out and try to live on McWages. After three, four, five or more years of university training, many Boomer kids have expectations of professional lives and fat salaries. Many seem content to suckle, until the big offer materializes.

How many? According to a recent TD Canada Trust survey, a staggering 17% of Boomers are delaying plans to sell their homes and downsize because their basements are populated with the boomerangs. And another 12% say they’ve shelved plans to move entirely, since they expect adult children to be living with them after retirement. Worse, almost 40% of all Boomers confess that when they retire (in short order) they’ll also still have a mortgage.

This is not a happy financial picture. And it’s about to get worse.

Remember, 72% of Canadians have no corporate pension to look forward to, which means they’ll have to survive on their own investments, plus the peanuts the government doles out. And those nuts are about to shrink.

For example, it makes sense for everyone to apply to receive their Canada Pension Plan benefits at age 60, instead of waiting five more years – since you have no idea how long you’ll live. But starting next month the feds are increasing the penalty for taking early CPP, so people doing so at sixty will be losing a fat 36% of their government pension by 2015.

Wrinkly old half-dead people like Boomers also qualify for the Old Age Security payment at 65, which hands over another $527 a month, per person. But with the demographic tidal wave sweeping across the land, that means Ottawa’s bill for this will jump from close to $40 next year to over $100 billion by 2030, as old farts explode in number from 4.7 million to 9.3 million. And you’d think they would have stopped breeding by now…

Obviously with the government wallowing in deficit and debt, this is not happy news. Which is why the coming federal budget (March) is rumoured to hike the qualifying OAS age from 65 to 67. In fact, there’s a growing squad of policy wonks in the Department of Finance who want full CPP benefits also moved back to age 67 (as the US is doing). And, as you know, anyone with a half-decent income in retirement has this government largesse clawed back anyway.

Trouble is, a staggering number of Boomers will absolutely depend on their CPP/OAS to make ends meet in a few years. As I’ve told you before, RRSP contributions have plunged in the last four years; four in ten households have no savings of any kind; and personal debt levels have been exploding at the rate of 7% per year. Mortgage borrowing now reaches past $1.1 trillion, which proves house prices have risen not because people make more money, but because they borrow more. Hence, 40% of Boomers will still be burdened with mortgage payments when they finish working.

With boomerangs and iguanas to support.

It’s impossible to play down the magnitude of this mess. An entire generation, born into unbridled post-war affluence, living through decades when inflation created money and erased debt and enjoying a swelling government safety net, has choked. Millions made the choice of throwing whatever investment dollars they had into a single asset – real estate. It may have worked while the economy chugged, but no longer. So without enough financial assets to actually provide income, even more needed as the feds cut back, what’ll they do?

Simple. Bail. There’s no choice. When the bulk of your net worth’s in just one thing, which is indivisible and immobile, you sell. And if you have to sell into a falling market, so be it.

This is why, regardless of what happens to interest rates, the GDP, taxes or your clingy kids, it’s inevitable the supply of real estate over the next few years will swamp demand. Those who claim Boomers will hang on to their homes until their emaciated and lifeless carcasses are found clinging to a chipping hunk of granite c-top, are mistaken. We are on the cusp of a generational hissy fit. It will not be pretty.

Fair warning, kids. Evacuate the damn basement.