Building an income: Ming's story

CASE STUDIES
Building an income: Ming's story
Investor Education Fund
Published Tuesday, Mar. 31, 2009 10:20AM EDT
Last updated Tuesday, Mar. 23, 2010 11:35AM EDT

With $20,000 extra to invest, Ming likes the idea of investing for income. But he doesn’t want to invest too conservatively. He hopes to retire within the next 10 years, and he wants to grow his savings without taking on too much risk.

Ming decides what to do: Ming sat down with his adviser, and together they created a portfolio that would balance income and growth. Here what they did with the money:

· Put $5,000 in a five-year, non-cashable Guaranteed Investment Certificate (GIC): Ming will get about $175 a year in interest from this investment, guaranteed.

· Put $5,000 in a 10-year government bond: He will get about $200 in interest each year from this investment, guaranteed.

· Put $10,000 in preferred shares: Ming hopes to get about $400 each year in dividends, paid as $100 once every three months. Here, there’s no guarantee. He plans to hold the stock for now so he won’t have to pay tax on any capital gains.

Result: Ming will get some of this extra income yearly, and some more often. Some of the money is guaranteed, and some of it is not. By putting about half of his money in non-guaranteed income investments (the preferred shares), he hopes to balance income with growth.

There are also certain tax benefits. The preferred shares pay dividends, which are taxed at a much lower rate than interest. That means Ming will be able to keep more of the income he makes from investing. He plans to reinvest this income so he can keep growing his savings until he retires.