Author: John Heinzl

I would like to add some gold to my portfolio as a hedge against the political and economic upheaval we’ve seen recently. In your opinion, what is the best way to get exposure to gold, and how much should I own?

With the price of gold surging about 45 per cent in the past year and hitting fresh record highs this month, more investors are turning to gold to add some juice to their portfolios and to hedge against uncertainty. Central banks have also been adding to their bullion holdings to diversify their foreign currency reserves.

If you’re keen on owning gold, my advice is to indulge in moderation. Yes, gold has been on a roll recently, but there are no guarantees the rally will continue. Moreover, unlike a stock or bond, gold pays no dividends or interest, so the only way to come out ahead is to sell your gold at a higher price than you paid for it. For these reasons, I believe a percentage allocation in the single digits is plenty for most people.

That said, I’ve never owned gold personally – except for my wedding ring – but I believe the metal does have benefits as a store of value and as a tool for diversification.

There are several different ways to invest in gold, each with its own pros and cons.

If you want to own physical gold directly, you can buy gold bars or coins from an online dealer or in person. Shop around for the best price and be sure to read customer reviews to make sure you are dealing with a reputable company. Regardless of where you buy your physical gold, you will pay a premium over the spot price of bullion. When you sell, you’ll take another haircut.

These price spreads are not trivial.

When I checked online bullion dealer silvergoldbull.ca earlier this week, the difference between the company’s selling and buying prices for a one-ounce gold bar produced by the Royal Canadian Mint was about $250. What’s more, you’ll face additional costs if you decide to insure your physical gold and store it securely in a safe deposit box at the bank, with the dealer or in a home safe.

If you want to avoid the hassles and expense of holding physical gold, buying an exchange-traded fund that owns gold may be the way to go. Gold ETFs trade on a stock exchange and are therefore more liquid than owning gold bars or coins directly. They have reasonable management expense ratios, and many gold ETFs come in both currency-hedged and non-hedged versions.

Examples include the iShares Gold Bullion ETF (ticker: CGL.C; MER: 0.55 per cent), its hedged counterpart (CGL; 0.56 per cent), the BMO Gold Bullion ETF (ZGLD; 0.23 per cent) and the hedged version (ZGLH; 0.23 per cent). The Royal Canadian Mint also offers exchange-traded receipts (MNT; 0.35 per cent) that provide investors with an interest in gold bullion held in custody by the mint, which is a federal Crown corporation.

A third option is to invest in gold mining stocks. This approach has the potential to offer higher returns than owning the commodity itself, because miners’ profits are leveraged to the price of gold. Many gold stocks also pay modest dividends, which may appeal to income-oriented investors. Another benefit is that some miners hedge part of their production to protect against swings in the price of the commodity.

However, mining is a risky business, which means it is important to do your due diligence before investing in any gold stock. Among Canada’s major gold producers, Agnico Eagle Mines Ltd. AEM-T is highly regarded by analysts for its strong free cash-flow generation, solid balance sheet and growth potential. Agnico Eagle’s quarterly dividend of 40 US cents equates to a yield of about 1.6 per cent, with the potential for the dividend to grow in the years ahead.

All 12 analysts who cover Agnico Eagle rate the stock a “buy,” with an average price target of $145.83, according to Refinitiv. The shares were trading Friday afternoon at about $138 on the Toronto Stock Exchange.

If the idea of owning individual gold mining stocks makes you nervous, consider an ETF that holds a basket of gold producers, such as the BMO Equal Weight Global Gold Index ETF (ZGD) or the iShares S&P/TSX Global Gold Index ETF (XGD).

Gold has been shining recently as geopolitical instability and economic uncertainty cause investors to look for safe-haven assets. Gold can help to diversify your portfolio and has the potential to provide capital gains over the long run. If you keep your exposure to gold modest, shop around for the best prices and focus on high-quality producers, you’ll be golden.

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.

I am worried about the impact of tariffs on my portfolio. With respect to investing in U.S. stocks, are Canadian-listed ETFs that employ currency hedging a good way to protect against losses if the Canadian dollar goes down?

I think you’ve got it backward. If you invest in U.S. stocks, either directly or through an exchange-traded fund, a weakening Canadian dollar will actually benefit you.

Consider a simple example. Say you bought a share of a U.S. company trading on the New York Stock Exchange for US$50 when the Canadian dollar was at 75 US cents. The purchase would have cost you $66.67 in Canadian dollars (50/0.75).

Now, suppose the loonie fell to 69 US cents while stock price stayed constant at US$50. Your U.S. stock would now be worth $72.46 in Canadian currency (50/0.69).

As a Canadian investor holding U.S. investments, your enemy is a rising Canadian dollar, not a falling one. If the loonie were to rise to, say, 80 US cents, the U.S. stock trading at US$50 would be worth just $62.50 in Canadian money.

With U.S. President Donald Trump this week slapping 25-per-cent tariffs on imported aluminum and steel and additional tariffs potentially on the way, the consensus seems to be that our struggling dollar – which was trading Friday at around 70.5 US cents – won’t be rallying any time soon.

But currency movements are notoriously difficult to predict, and given the capricious nature of Mr. Trump’s decision making, anything is possible.

So, what to do?

Well, to protect against the risk of a rising loonie, you could purchase a currency-hedged version of a Canadian-listed ETF that invests in U.S. stocks. One example (among many) is the iShares Core S&P 500 Index ETF (CAD-hedged), which trades in Canadian dollars on the Toronto Stock Exchange (ticker symbol: XSP) and holds all of the companies in the S&P 500 index.

There are arguments for and against hedging. If you’re nervous about a potential rise in the Canadian dollar, a hedged ETF should, at least in theory, help to control currency-related volatility. In a perfect world, the hedged ETF would achieve the same return – before taxes and fees – of the underlying index it tracks, regardless of whether the Canadian dollar rises, falls, or remains unchanged against the U.S. dollar.

But in practice, hedging is far from perfect. That’s because the methodology – which involves locking in an exchange rate by buying currency forward contracts, usually for a month at a time – isn’t exact, and also because it adds to the ETF’s costs.

What’s more, if you hedge at the wrong time, you could pay a price.

For the three years from Dec. 31, 2021, through Dec. 31, 2024, the S&P 500 index gained 23.4 per cent, excluding dividends. During the same period, the Canadian dollar tumbled nearly 10 US cents. As a result, Canadian investors who held the non-hedged version of the iShares S&P 500 index ETF (XUS) achieved a significantly higher return of about 40 per cent, thanks to extra juice from the falling loonie. The hedged version (XSP) rose just 19.3 per cent.

Hindsight is 20-20, of course, but the past few years were a terrible time to hedge one’s U.S. exposure.

What about the future? I don’t have a crystal ball, but it’s worth noting that the Canadian dollar has recovered some ground in recent weeks, indicating that the tariff threats are at least partly priced in. Should sanity prevail and an all-out trade war be averted, it’s possible that the loonie could rally.

On the other hand, the loonie could drop further if Mr. Trump follows through on his threat to slap 25-per-cent tariffs on most imports from Canada and Mexico when the 30-day reprieve ends in early March. One hopeful sign is that the pushback from U.S. business leaders opposed to tariffs is getting louder.

As James Farley, chief executive officer of Ford Motor Co., warned this week: “Let’s be real honest. Long term, a 25-per-cent tariff across the Mexico and Canadian border would blow a hole in the U.S. industry that we have never seen.”

Is the risk of a rising loonie high enough to justify hedging one’s U.S. investments? We’ll only know after the fact. In the meantime, if you are worried about a rise in the Canadian dollar, you could compromise by hedging a portion of your U.S. investments while leaving the rest unhedged. That way, regardless of what happens to the Canada-U.S. exchange rate, you will have made the correct call for at least part of your portfolio.

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.

I’ve accumulated more than $2,000 of cash in my model Yield Hog Dividend Portfolio, and today I’m putting some of that money to work.

With the U.S. tariff threat still looming and a Canadian federal election expected as early as the spring, this might seem like a risky time to be investing. But there is a method in my madness: If I wait until things settle down – and let’s hope they do very soon – stock prices could well be higher by then.

As Warren Buffett famously said, it pays “to be fearful when others are greedy and to be greedy only when others are fearful.”

With that in mind, I’m adding 30 units of Brookfield Infrastructure Partners LP (BIP.UN), bringing my total to 250 units.

I’ve long been a fan of Brookfield Infrastructure for several reasons.

As a global infrastructure giant, it owns a diversified portfolio of assets that are essential to the economy, including utilities, pipelines, data centres, toll roads, ports and telecom towers. These long-lived assets have high barriers to entry, which creates a wide economic “moat.” They also throw off growing cash flows that, in a majority of cases, are indexed to inflation.

I like it when companies give me money. I like it even more when the amount increases every year – an area in which Brookfield Infrastructure excels.

Thanks to the predictable nature of its businesses, the Bermuda-based limited partnership has raised its distribution to unitholders for 16 consecutive years. The latest increase was announced along with fourth-quarter results on Jan. 30, when the partnership and its sister corporation, Brookfield Infrastructure Corp. (BIPC), hiked their quarterly payouts by 6 per cent to 43 US cents per unit or share, respectively.

Including the recent increase, the partnership units currently yield about 5.1 per cent, while the corporation’s shares, which trade at a higher price, yield about 4.1 per cent.

(The partnership and corporation pay out the same quarterly amount. However, the partnership’s distributions typically include foreign dividend and interest income, Canadian dividend and interest income, return of capital and capital gains, whereas the corporation pays dividends that are eligible for the Canadian dividend tax credit. That makes the latter a good choice for non-registered accounts.)

There are more distribution increases to come, analysts say.

“We believe BIP is set up as an attractive investment opportunity with a strong organic project backlog, accelerating capital recycling activity and an attractive distribution growth profile,” Robert Catellier, an analyst with CIBC Capital Markets, said in a research note.

Mr. Catellier rates the units “outperformer” and is one of nine analysts with a “buy” or equivalent rating. There are three hold recommendations and no sells, and the average price target for the U.S.-listed units is US$40, according to Refinitiv data. On Friday, the units closed at on the New York Stock Exchange and on the Toronto Stock Exchange.

Distribution increases need to be supported by growing cash flow to be sustainable, and Brookfield Infrastructure is delivering in that regard. For the year ended Dec. 31, funds from operations (FFO) – a cash flow measure – rose by about 8 per cent to US$2.47-billion or US$3.12 per unit, driven by inflation-linked price increases, growing business volumes and the commissioning of more than US$1-billion of new capital projects.

Cash flow is expected to continue growing in the years ahead, with FFO per unit rising by a projected 8.7 per cent in 2025 and a further 9.4 per cent in 2026, according to analysts’ estimates.

“Following a relatively light 2024 for capital deployment, the new investment pipeline has been rebuilding and is the deepest in several years,” Devin Dodge, an analyst with BMO Capital Markets, said in a note to clients.

Investments in digitalization, such as data infrastructure and midstream energy assets, will be key areas of focus, with capital recycling – selling assets to fund higher-return investments – playing a growing role in Brookfield Infrastructure’s growth, Mr. Dodge said.

There is almost certainly more geopolitical and economic turmoil ahead, but thanks to Brookfield Infrastructure’s growing portfolio of wide-moat assets and deep connections around the world, I expect that the units will be delivering capital growth and rising distributions for many years to come.

(Disclosure: the author owns BIP.UN and BIPC personally and holds BIP.UN in his model Yield Hog Dividend Growth Portfolio. The purchase of 30 BIP.UN units was completed at Wednesday’s closing price and consumed $1,418.10 of cash. View the complete model portfolio online at tgam.ca/dividend-portfolio.)

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.