This may be a naive question, but if I have $7,000 in cash to contribute to my tax-free savings account, why would I invest it in a dividend exchange-traded fund rather than a guaranteed investment certificate yielding 4 per cent to 4.5 per cent?
GICs have their place in a well-balanced portfolio. Because their principal value doesn’t fluctuate and their returns are guaranteed, they provide stability and peace of mind during periods of market volatility. That’s why, for the fixed-income portion of one’s portfolio, GICs are a good solution.
However, that stability comes at a cost – several costs, actually.
First, GICs don’t offer any growth potential. If you invest in a five-year GIC that yields 4 per cent (a rate you’d be hard-pressed to find right now, by the way), you’ll make 4 per cent annually – no more, no less. You’ll feel like a genius if the stock market treads water or falls over that period, but if the market rises substantially, that GIC won’t look nearly so appealing.
History has clearly favoured stocks over GICs. Over the past decade, the S&P/TSX Composite Index has posted an annualized total return of about 9 per cent, including dividends. No GIC can keep up with that. True, the stock market had plenty of ups and downs over that period, but volatility is the price investors pay for the superior returns that stocks deliver.
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A second drawback is that GICs lock up your money for a fixed period. If you need the cash to buy a new car or replace your furnace, you won’t be able to access your funds (exceptions are sometimes made in unusual circumstances, depending on the financial institution). For that reason, you should only purchase a GIC if you’re certain you won’t need the funds before the maturity date.
A third downside of GICs is that the interest is taxed at your full marginal rate. This isn’t a factor in a TFSA, registered retirement savings plan or other registered account in which investment earnings are not subject to tax. But in a non-registered account, the tax hit on interest tops out at more than 50 per cent in most provinces for the highest income bracket. On an after-tax basis, GICs may not even keep up with inflation.
Dividend stocks and dividend ETFs don’t have the same drawbacks.
In addition to providing the potential for capital appreciation, dividend stocks and ETFs also typically increase their income over time. Many companies – such as banks, utilities and power producers – have been raising their dividends for years, driven by their growing earnings, out of which dividends are paid. The yield of a GIC, on the other hand, is fixed.
Stocks and ETFs are also more liquid than GICs. If you need the money for an unexpected expense, you can always sell a portion of your holdings.
Finally, dividend stocks and ETFs also win in the tax department. Thanks to the dividend tax credit, the income from dividends is generally taxed at much lower rates than interest from a GIC. In Ontario, for example, someone with $100,000 of income would pay combined federal and provincial tax of 31.48 per cent on interest but just 8.92 per cent on eligible dividends.
In the lowest income brackets, the tax rate on dividends is actually negative in many provinces. According to TaxTips.ca, an Ontario resident with taxable income of $52,886 or less would have an effective tax rate on eligible dividends of negative 7.55 per cent for 2025. Because the dividend tax credit is a non-refundable credit, the government won’t send you a cheque for the negative amount, but you can use the credit to offset your other taxes owing.
Let me be clear: I am not trying to steer you away from GICs. I own them myself. They are especially useful if you are saving for a large future expense, such as a home purchase or a child’s postsecondary education, and don’t want to put your principal at risk. Many investors also use GICs for the fixed-income portion of a balanced portfolio. Building a GIC “ladder” – with maturities ranging from one to five years – can be a useful way to diversify your GIC holdings and control your interest rate risk. When the one-year GIC matures, you would roll the proceeds into a new five-year GIC, and so on.
But for long-term growth of both capital and income, stocks and ETFs are the clear winner. So don’t let your desire for safety prevent you from enjoying the historically higher returns that stocks offer.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.