The divide used to be fairly clear: Equities for the young ’uns, income solutions for retired folks. The mere mention of the word “dividend” to a pre-retiree sitting across your desk might have drawn stares.

But in today’s environment of heightened volatility, more and more investors and advisors alike are discovering what some have known for a long time: Cash flow is important in any plan, especially when stocks are having the kind of bumpy ride we’ve seen recently.

Equity and fixed-income

“If you look at the IFIC data, you’re seeing money flowing into fixed-income funds, into balanced funds and into income funds,” says Dennis Mitchell, vice president and senior portfolio manager with Sentry Investments in Toronto.

Obviously, investors are starting to fixate on cash flow.

But income solutions include a wide variety of investments, so how do you choose the best products for your clients?

“In general,” says David Miner, financial advisor with Equity Associates Inc. in Toronto, “the younger we are, the bigger the component in equity we should have.”

That said, bonds and other fixed-income products can help balance out the risk that accompanies large equity holdings. To accomplish that, Miner suggests a wrap portfolio for younger clients, “where there might be a small fixed-income component that adds to the overall stability.”

In this scenario, “the portfolio manager isn’t locked into equity, [and] if equity markets get frothy, he or she can hide a little bit in the fixed-income market,” explains Miner. “Most of what I do is balanced in some fashion. I’m big into risk management, and bonds really are very good for helping you to temper volatility.”

Jeanette Brox, CFP, senior financial consultant in the Toronto Central office of Investors Group, believes choosing the right products for clients ultimately depends on their timeframe, their purpose, what they’re doing with the money and how soon they’re going to need it.

For many clients, guaranteed income funds (GIF) may be a way to go.

“A lot of professionals want to take a look at these products,” Brox says. “Since the GIF is an insurance product, one of the benefits it provides is for long-term investment growth potential with the protected guarantee feature to help minimize risk.

“These products are good for [professionals and business owners],” she asserts, “because they can provide creditor protection. I find, too, that a lot of my business and professional clients take a fairly long-term view, so they get kind of excited when you start talking about estate management and minimization of probate fees—how to preserve and protect their hard-earned dollars.”

Brox is also a fan of dividend funds. “Dividends aren’t guaranteed, but if you look at the quality investments, like the banks, insurance companies, utility companies, they’re cash cows. They pay out those dividends religiously.”

A dividend fund that holds such companies can let investors make “a substantial amount of money and pay very little in taxes because of the dividend tax credit. [It’s] much better than a GIC, which would produce income [but] wouldn’t even keep ahead of inflation and would lose so much to taxes.”

Miner warns against handcuffing a portfolio manager, though, as it’ll tie down performance.

“The higher the yield on the bond or equity, the more it cushions market volatility. The math is absolutely common sense. But as an advisor, do I want to go out and sell clients high-yielding preferred stock or dividend funds? I’d rather say to a portfolio manager, ‘I want a balanced portfolio. I’m sure you understand the way dividends cushion volatility, so here’s the money. You figure out now what to do.’ ”

Total-return approach

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