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Can Money Really Grow On Trees?

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We are all familiar with the saying “money doesn’t grow on trees”. As children, we have probably all been told this when we have asked for something that cost too much money. If you are a parent, you have probably also had to tell your own children this at some point in their lives too. While there is a plant (Pachira Aquatica) that is more commonly know as a ‘Money Tree’, it does not have leaves of $20 bills or grow $100 bills like they were apples, nor does such a plant exist. So in a literal sense, no, money obviously cannot grow on trees. However, in a figurative sense, there are investments available that can provide recurring monthly income that is analogous to a tree that continuously produces money as though it were leaves or fruit.

Taking advantage of higher rates

The recent sharp rise in interest rates has caused the value of many stocks and bonds to decline, creating a challenging environment for investors. The recent rebound in inflation has led to the US Federal Reserve to raise their interest rate forecast for the rest of 2023 and into 2024, which again led to a sell-off in both stocks and bonds through September. While these “higher for longer” interest rates are a headwind for the general economy and borrowers, they can be a beneficial tailwind for lenders and income investors. After many years of low interest rates keeping returns on Savings account and GICs in the low single-digit range, the current higher-rate environment is providing investors with an opportunity to earn mid- to high-single digit returns without the need to take on higher levels of risk or volatility.

While GICs are currently paying interest in the 5.0-5.5% range, they still normally only pay interest at maturity and are not a good solution for creating a monthly income stream. The recent increase in availability and popularity of “Alternative Investments” (or “Liquid Alts”) has brought a growing number of investment options that are paying annual yields as high as 8-12%, which are generally paid on a monthly basis. This means someone with $100,000 to invest could potentially be generating $8,000 - $12,000 annually in supplemental income, or $665 - $1,000 per month, without touching their initial principal. For someone with $1,000,000 to invest, this translates into a potential $6,665 - $10,000 in recurring and effectively passive month income, while leaving the principal untouched.

Pay less (or nothing) in tax

While a continually regenerating source of income sounds great, a continually regenerating source of tax-efficient (or tax-free) income is even better and is possible if the money is invested in a Non-Registered account or a TFSA. Many of these investments that pay high monthly distributions also often have these distributions taxed as Capital Gains or Dividends, which are taxed at a significantly lower tax rate than Interest income in Non-Registered accounts. This means that you could potentially only pay tax on approximately half of the income earned for non-registered accounts, or none at all in a TFSA! While contribution room may limit how much someone can invest into a strategy like this in their TFSA, this strategy can also help regenerate TFSA contribution room. If you take money out of your TFSA, you get that amount back in contribution room the following year. If you are leaving your initial investment in your TFSA and taking the distributions as a source of income, your TFSA balance would stay the same, but you would generate additional contribution room equal to the amount of income you withdrew from the TFSA annually. This would be in addition to the new annual TFSA contribution room, and is a clever way to add extra contribution room to your TFSA without depleting the value of it.

Using income to build wealth

What would you do with hundreds or thousands of dollars in additional income each and every month? That could mean the difference between not falling behind the rising cost of living and taking on more debt, or maybe that gives you the opportunity to retire early and live out your dreams. Using it to pay down debt, or accelerate paying off your mortgage, are both great ideas and ways to build your net worth and minimize the negative effect of higher interest rates in the future. As long as you only utilize the income and do not spend any of the capital, this “money tree” concept theoretically provides income for the rest of your life, and can even be a source of generational wealth to pass on to your kids or grandkids.

- Dennis Rubeniuk, Investment Advisor

Dennis Rubeniuk is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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