Avoiding the Yield Trap: Are You Too Focused on Generating Income From Your Investments?

Avoiding the Yield Trap - Chris Heakes

Having your investments pay you large dividends or yield sounds great. It’s truly passive income where money just shows up in your account without you having to do anything, and without you having to sell off any of your investments even when markets are down.

But what if you get too focused on maximizing dividends or yield in your portfolio? After all, there is no free lunch when it comes to investing. There are always tradeoffs, and it turns out that there are some pretty significant disadvantages for investors who just try to maximize their yield or dividends at all costs, and it can result in you actually getting a substantially lower “total return” (dividends + capital gains) over time, on your investments.

About Our Guest

To help us learn what pitfalls to look out for when deciding on our investments, particularly when it comes to some of these very high yielding ETFs that you may be seeing recommended online, we have Chris Heakes. Chris has over 14 years of experience in the investment industry. He’s a CFA, has a Masters of Finance from the University of Toronto, and is a Director and Portfolio Manager at BMO Global Asset Management.

Chris is going to take us through what we should look out for so that we don’t fall for the yield trap.

We’ll also cover hidden fees that you may be unknowingly paying on some ETFs, along with some arguably deceptive advertising to look out for that you may have seen here in Canada when it comes to your investments.

Lots to learn in this interview with Chris, so let’s jump right in.

Resources Mentioned:

ETF Comparison Tool

BMO ETFs Tools and Resources

Morningstar Canada (to obtain “total return” performance on specific ETFs)


A Big Thanks to Our Sponsors:

“Views from the Desk” Podcast

On this podcast, we often cover best practices that can not only help you now, but will also be relevant throughout your investment lifetime. But what if you also want an update on what is happening with your investments, the markets, and the economy right now?

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Questions Covered:

  1. Chris, one issue that’s really started to negatively impact many Canadian investors is this trend to hunt for the highest possible yield on our investments, which can actually end up hurting the total return that we get on those investments long term.

    Can you start by first defining what we mean by “yield” vs the “total return” on our investments, and how do some investors fall into this trap?

  2. Another potential trap that I noticed with some ETF providers is that they’ll advertise a 0% management fee on their ETFs, but then there are some hidden fees on the back-end. For example, charging the investor fees on the underlying ETFs. Can you talk about some of these hidden fees on our investments that we need to be aware of? and does looking at the MER include all of them?

  3. One type of ETF that has recently fallen under scrutiny and got the attention of the regulators here in Canada are some of the covered call ETFs out there. There’s been some potentially misleading advertising proclaiming extremely high yields, without sufficient mention of the potential downsides of some of these ETFs. Can you speak to this issue and how we can protect ourselves?

  4. Over the years, I’ve noticed that there are different schools of thought when it comes to how our investment portfolios should look while we are in the accumulation stage during our working years, vs the decumulation stage when we are financially independent and living off our investments.

    Some will argue that you need to shift to more income producing investments in retirement such as focusing more on things like blue chip dividend stocks or covered call ETFs.

    Others will argue that you should continue to stick to investments like total market index ETFs where you’re just buying the market as a whole through something like an asset allocation ETF.

    What are your thoughts on this debate?

  5. I noticed BMO has ETFs for each of these schools of thought. How do you suggest we decide which approach is right for us here in Canada?

  6. Can you tell us more about where we can see more of your work and where we can learn more about how to properly invest with ETFs?


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