# Preferred Shares



## GOB (Feb 15, 2011)

I've been doing some reading on preferred shares, and would like to get into them as a slightly more risky but much more lucrative alternative to the fixed income portion of my portfolio.

Does anybody own preferred shares? What kind of things should I be looking at in deciding which ones to pick? Any suggestions?

Right now I'm looking at BNS.PR.P which is yielding 4.7% - the equivalent of a 6% GIC (of course with a bit more risk).


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## Causalien (Apr 4, 2009)

For a detailed look, you will want to look at the default risk of the company in their 10k filings. You will want to look at their debt and whether or not their income can sustain the interest payments on their debt. The annual report will usually include the average interest rate on their outstanding debt.

Personally, I usually pick preferred that hasn't surpassed their issuing price yet (Typically $25) because if they do recall their preferred, you will be forced to sell them at the $25 value. 

Depending on what type of account you are putting your preferred shares in, you might want to buy different preferred shares based on the account type. But that's for another day.

For starters, I recommend cumulative perpertual preferred, since they will retain their dividend if they need to halt their dividend and these are usually not recalled.


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## kcowan (Jul 1, 2010)

I would recommend that you follow prefblog.com until you understand what is being discussed there. It is the definitive resource for Canadian Pref shares. And it is free.


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## I'm Howard (Oct 13, 2010)

CDZ, ETF of preferred shares.

MO, PFE, TRP, BCE , if you want to own direct.

Preferreds are a better alternative to Bonds, at this time.


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## Cal (Jun 17, 2009)

kcowan said:


> I would recommend that you follow prefblog.com until you understand what is being discussed there. It is the definitive resource for Canadian Pref shares. And it is free.


Great post. 

Thanks. Personally, there is lots I could learn about preferreds. Appreciate the site recommendation.


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## larry81 (Nov 22, 2010)

are preferred shares linked to interest share like bonds ?


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## bean438 (Jul 18, 2009)

Preferred shares are not preferred.

This is what Stephen Jarislowsky says.

He is a billionaire, and I am not. 

I will listen to him.


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## kcowan (Jul 1, 2010)

larry81 said:


> are preferred shares linked to interest share like bonds ?


They are bond-like with a fixed yield but they are treated as dividends for income tax. They have a number of zingers that you have to pour over the ine print in the prospectus to figure out. Corporate bonds are the same.


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## Greyhound86 (Feb 21, 2010)

Among other things allready mentioned it is important to allways look at the "yield to worse"

Some of the pref's look good at first glance but if called only yield you slightly more than 3%. 

Pref's are interest rate sensitive like bonds. An increase in interest rates can cause the share price to drop.


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## Jon_Snow (May 20, 2009)

Canadian bank preferreds offer up 5% yields.. but yes, a rising interest rate environment will cause the share prices to drop. While I'm still working I'm more interested in the potential capital growth of common stocks... but when I reach FIRE status, and income is more desirable, preferreds will be an important part of my portfolio.


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## fatcat (Nov 11, 2009)

> CDZ, ETF of preferred shares.
> 
> MO, PFE, TRP, BCE , if you want to own direct.
> 
> Preferreds are a better alternative to Bonds, at this time.


 i believe it's CPD not CDZ

i just sold CPD (which i bought to add return to the mix) because:

a) i don't really understand the concept of why they are better investment product, i.e. they are sort of a ******* child, not quite stocks and not quite bonds 
b) i understand they are really only desirable for high net income individuals which i am not since i am retired 
c) they are sensitive to interest rate rise

like you i did "some reading" and made a mistake

i agree with others who say that you need to do a lot of homework before you buy preferred's

but yes, the yields look juicy


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## kcowan (Jul 1, 2010)

Preferreds are one of the biggest scams perpetrated on the Canadian Investing public. They make it so complex that the average investor goes cross-eyed. 

That is why I use James Hymas. He is worth his MER! and I don't say that about any other investment!


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## GoldStone (Mar 6, 2011)

kcowan said:


> Preferreds are one of the biggest scams perpetrated on the Canadian Investing public. They make it so complex that the average investor goes cross-eyed.
> 
> That is why I use James Hymas. He is worth his MER! and I don't say that about any other investment!


Just curious how you have your funds invested with him. Malachite fund or segregated account?

Why?


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## Square Root (Jan 30, 2010)

I have considered pref shares for the higher yield and lower tax. But when the common shares are paying in the 3.5%to 4% range and offer the prospect of increasing dividends, I decided to stick with the common. Working out so far.


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## RichmondMan (Jan 31, 2011)

My choice is ETF shares at the moment.


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## Cal (Jun 17, 2009)

http://www.theglobeandmail.com/glob...o/how-to-buy-preferred-shares/article2001747/


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## kcowan (Jul 1, 2010)

GoldStone said:


> Just curious how you have your funds invested with him. Malachite fund or segregated account?
> 
> Why?


MAPF. It was new money and so I was not selling anything to get into it. Another associate has him manage an RRSP and the returns are close, lagging by a couple of points.


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## Cal (Jun 17, 2009)

I thought this was a good G&M article on preferred shares:

http://www.theglobeandmail.com/glob...rap-of-rate-reset-preferreds/article12579958/


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## james4beach (Nov 15, 2012)

I also strongly caution against preferred shares. I don't even know where to start. As others have said, they're complicated as heck. You really have to be an expert in this field (it's a specialized area). This alone is usually enough to deter me from an investment vehicle.

Another criticism: they definitely are riskier than bonds. These things are much closer to regular stocks than they are to bonds. Quick example. In 2008, the S&P 500 fell as much as -45% and preferred shares (PFF) also fell the same amount, -45%. Corporate bonds on the other hand (LQD) fell only down to -18%. The preferred shares are much riskier than bonds, and pretty much move with regular stocks.


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## fatcat (Nov 11, 2009)

james4beach said:


> I also strongly caution against preferred shares. I don't even know where to start. As others have said, they're complicated as heck. You really have to be an expert in this field (it's a specialized area). This alone is usually enough to deter me from an investment vehicle.
> 
> Another criticism: they definitely are riskier than bonds. These things are much closer to regular stocks than they are to bonds. Quick example. In 2008, the S&P 500 fell as much as -45% and preferred shares (PFF) also fell the same amount, -45%. Corporate bonds on the other hand (LQD) fell only down to -18%. The preferred shares are much riskier than bonds, and pretty much move with regular stocks.


it's true that they tanked in 2008 which means they are more volatile than bonds 

but they have the tax advantages of stocks which is not a small thing... for an income oriented investor who holds 5-10% in a fund they can be a decent asset and can pop your yield

you don't need to be an expert to buy ZPR (120 holdings) or CPD (180 holdings) other than knowing your objectives and your risk tolerance

but yes, they are stocks not bonds


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## gibor365 (Apr 1, 2011)

I'm curious how interest rate rise, let's say by 0.5% gonna affect preferred shares ETFs like PFF or PGX?


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## dime (Jun 20, 2013)

Perhaps we might see something like the 'taper tantrum' from May 2013? 
Just the fears of rising rates caused PGX to drop over 10%. 











Here's a pretty good report on the Canadian preferreds market from Raymond James you may wish to check out: 
http://www.raymondjames.ca/lewisrosen/preferred.aspx

And from CIBC
http://www.cibcwg.com/c/document_li...b68-e59e-45f0-817f-dcfc349fbdd6&groupId=92706

They note that rate-resets have dropped hard lately because of latest rate drop by the BOC (they will now renew at a lower rate). Rate-resets compose most of the market, bringing down the whole of the Canadian preferred market. 











You can see in the chart of ZPR an 8% drop during the taper tantrum and now the latest 6% drop. 

What's messed up about this is that the Canadian market dropped then for the fear of potential rising rates and now again for the drop in rates. 

It's looking the preferred market is just bound to lose either way...


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## gibor365 (Apr 1, 2011)

From what I understand the least sensitive to interest rates are Floating Rate Preferred...but have no idea if there are such ETFs..

actually found 1 new - PowerShares Variable Rate Preferred PortfolioNYSE Arca:VRP


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## dime (Jun 20, 2013)

Has anyone ever done the rate reset conversion to the floating rate series? I'm not sure what I need to do for converting a rate-reset preferred to the floating rate series on the reset date.

The reset date for FFH-PR-E is 31-Mar-2015 with a spread of 2.16%
And BNS-PR-Y is 26-Apr-2015 with a spread of 1%

In both cases I think a conversion to the floating rate series would be my best option. I don't want to lock in a low rate of 1.75% for 5 years with the risk of rates rising. Also if I sell these preferreds now, I would be taking in a capital loss in the share price.

Maybe holding the floating rate series for the next few years would be better because at least the share price should rise as rates increase?


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## Numbersman61 (Jan 26, 2015)

dime said:


> Has anyone ever done the rate reset conversion to the floating rate series? I'm not sure what I need to do for converting a rate-reset preferred to the floating rate series on the reset date.
> 
> The reset date for FFH-PR-E is 31-Mar-2015 with a spread of 2.16%
> And BNS-PR-Y is 26-Apr-2015 with a spread of 1%
> ...


You should receive a notice one month prior to conversion date outlining new terms. If you wish to convert to floating rate, you must elect prior to conversion date. I own TRP.PR.F which took a drastic drop after BOC rate cut.


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## AltaRed (Jun 8, 2009)

One point of caution. The real culpirt is the yield of GoC 5 year bonds which dropped for any number of reasons (rate cut included). The bond market operates under its own collective view of the world by the aggregate of its investors and with the drop in short term rates, demand for ST bonds shot up.


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## Numbersman61 (Jan 26, 2015)

AltaRed said:


> One point of caution. The real culpirt is the yield of GoC 5 year bonds which dropped for any number of reasons (rate cut included). The bond market operates under its own collective view of the world by the aggregate of its investors and with the drop in short term rates, demand for ST bonds shot up.


The floating rate is based on 3 month GOC Treasury Bill Yield. It is set quarterly.


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## AltaRed (Jun 8, 2009)

I was referring to fixed resets which is what the conversation was about. Don't blame ZPR performance (the major dip in near term fixed reset prefs) on anything other than the GoC 5 year bond yield falling from the circa 1.5% range to circa 0.7%. The decision to go a floater vs stay on the 5 yr reset format depends on pricing at the time and one's dice on interest rates in the next 5 years.


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## Squash500 (May 16, 2009)

I don't really care about the drop in rate-resets. ZPR is getting hurt a little bit more than CPD. Reason being, CPD has some perpetuals in the CPD index. I own a lot of CPD in my non-registered account. I own it just for income purposes.

I don't care if the share price of CPD drops or not. The income is very tax-efficient as well. All of the income in CPD is Canadian dividend income.

It beats getting only 1.45% on a 1 year GIC at TDW.


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## Numbersman61 (Jan 26, 2015)

I also am not too concerned about drop in share price of preferred shares. Other than the TRP floating rate preferred, I only own rate resets. My dividend income has not changed and I expect rates to have recovered by reset date.
Good luck trying to find a TD GIC paying 1.45% - much lower rate now.


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## Squash500 (May 16, 2009)

Numbersman61 said:


> I also am not too concerned about drop in share price of preferred shares. Other than the TRP floating rate preferred, I only own rate resets. My dividend income has not changed and I expect rates to have recovered by reset date.
> Good luck trying to find a TD GIC paying 1.45% - much lower rate now.


Sorry, I was talking about TD Direct....the discount brokerage of TD. The best 3rd party GIC at TDW pays 1.45% for a I year term.

Actually when GOC cut the interest rates, it helped to increase some of the prices of certain perpetual preferreds. 

Perpetuals are kind of similar to long term bonds in a way. The lower interest rates fall, the more perpetuals and long term bonds increase in price, with all things being equal.


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## james4beach (Nov 15, 2012)

Let's revisit preferred shares, shall we?

After I warned that they are specialized/complex instruments, and riskier than bonds, fatcat remarked



fatcat said:


> for an income oriented investor who holds 5-10% in a fund they can be a decent asset and can pop your yield ...
> 
> you don't need to be an expert to buy ZPR (120 holdings) or CPD (180 holdings) other than knowing your objectives and your risk tolerance


Fast forward to summer 2015. Preferred shares are falling sharply and it's not due to rising interest rates (in fact interest rates have been falling).

CPD now has -7.6% 1 year return; 3 year annualized -1.1%; 5 year annualized 2.1%. Since inception, annualized 0.9%. As you can see *CPD's returns are significantly worse than the return from GICs* both in the short and long term.

BMO's ZPR is doing even worse, and annualized -4.3% since inception. Do you realize you would have been better off holding cash than ZPR?

So what take away messages do we have. The main one is, I think, don't under-estimate risk. These are complex and difficult to understand investments. It's not just as "simple as buying an ETF".

Yield chasing is dangerous. Here, you've ended up with an investment that has done worse than GICs or even cash.

Third is my final point, one which is much maligned here on CMF, that savings accounts and GICs are not that bad a place to put your money.


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## Nordic (Dec 17, 2014)

james4beach said:


> Let's revisit preferred shares, shall we?
> 
> After I warned that they are specialized/complex instruments, and riskier than bonds, fatcat remarked
> 
> ...


Preferred share ETFs have sucked, yes, but quality preferred shares (George Weston, Power Corp, WestCoast Energy, Fortis, etc.) have indeed provided solid 5.5% returns. Just don't buy an ETF, look for preferreds that didnt drop in value during the summer of 2011, and you'd do fine.


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## AltaRed (Jun 8, 2009)

The above reflects a poor understanding of preferred shares AND the differences between fixed reset perpetuals and straight perpetuals AND the differences between ZPR and CPD (for example).

ZPR is full of fixed resets in which the dividend yield, after the initial 5 year issue period is set to a GOC5 plus a spread. As GOC5 yields have come down (instead of up), those fixed reset prefs with dividend yields resetting in the past 12 months and likely the forward 12 months are resetting at lower yields than the initial yield. Hence market values have dropped below par of $25 accordingly, in some cases severely. OTOH, as bond yields have come down, straight perpetuals have gone up in value a bit because their dividend rate is fixed like a 30 year bond and that rate is slightly more attractive at current long term bond prices. IOW, straight perpetuals and fixed reset perpetuals are behaving in opposite directions. As interest rates increase, fixed resets will recover in value (like a 5 year GIC ladder) and straights will be under pressure. CPD has a mix of fixed resets and straights and hence the reason for the 'less worse' performance of CPD vs ZPR in the last 5 years. That will change as and when GOC5 bond yields increase.

Think about fixed reset prefs more like a GIC ladder and straight perpetuals like a 30 year bond. One does not see the effect of market pricing on GIC ladders because there is not published secondary pricing on GICs. Over the long term, prefs will (should) outperform GICs handily, especially in taxable accounts. Prefs are not for the novice investor though. One has to understand WHY one holds prefs and what type of prefs in their portfolio. I have about a 10% weighting in prefs (individual issues, not ETFs) and they are being held as pseudo-fixed income investments for the long haul (10-25 years). They are a mix of fixed resets and straights and while I do not like what is happening currently (underwater), that is a temporary aberration given BoC actions.

FWIW, I also have about a 10% portfolio weighting in a GIC ladder for my FI component in registered accounts, so I am not knocking the value of GICs. It is GICs and Prefs and REITs that help provide me with a good sleep at night.


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## fatcat (Nov 11, 2009)

james4beach said:


> Let's revisit preferred shares, shall we?
> 
> After I warned that they are specialized/complex instruments, and riskier than bonds, fatcat remarked
> 
> ...


what a ridiculous argument

if you have a diversified portfolio across major equity sectors, bonds (or GIC's, i have both) , preferreds (of which i have zero) reits and some commodities you are always going to have some assets that are down, plus, the numbers you cite don't include dividends

you are speaking as an investor who is completely un-diversified (i.e. you have bet the farm on risk-free low-return assets and gold) and are trying to justify your positions

sorry james, you have an unstoppable urge to cherry pick the numbers to try and justify your positions and i can't let that pass


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## james4beach (Nov 15, 2012)

fatcat, sometimes I can't tell whether you're trolling/being sarcastic or if you actually believe the things you write.

Here's an example where *you* painted preferreds as an easy investment, for easy yield, and all someone has to do is buy these ETFs.

Now we see that the performance sucks. The numbers I cite * do * include dividends, they are the total returns directly from the ETF provider's web sites. Those always include dividends. The preferred ETFs are doing worse than GICs and one of them is worse than cash!


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## fatcat (Nov 11, 2009)

james4beach said:


> fatcat, sometimes I can't tell whether you're trolling/being sarcastic or if you actually believe the things you write.
> 
> Here's an example where *you* painted preferreds as an easy investment, for easy yield, and all someone has to do is buy these ETFs.
> 
> Now we see that the performance sucks. The numbers I cite * do * include dividends, they are the total returns directly from the ETF provider's web sites. Those always include dividends. The preferred ETFs are doing worse than GICs and one of them is worse than cash!


preferred shares are a perfectly acceptable asset to own in a reasonable amount especially for high-income investors

all assets go through rising and falling cycles

you and i have an edgy but respectful dialogue so far

please do not start the silly game of combing through all my posts to see where i have been wrong, you will find many, i am certain, i can't predict the future

as the old saying goes: people in glass houses etc etc 

this is your thing james, cherry picking numbers to prove that your investment choices are the correct ones


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## james4beach (Nov 15, 2012)

You're right, we should not comb through old posts as we have both been plenty wrong. I certainly have too; I've done pretty badly on CEF.A which was my precious metals fund.

Maybe we can keep it constructive and use this as an example of investment 'risk'. You might buy something for yield, like REITs or preferred shares, and then still have a low 'total return'. I think it's healthy for everyone to be aware that high dividends and high yields do not necessarily translate to good returns.


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## fatcat (Nov 11, 2009)

james4beach said:


> You're right, we should not comb through old posts as we have both been plenty wrong. I certainly have too; I've done pretty badly on CEF.A which was my precious metals fund.
> 
> Maybe we can keep it constructive and use this as an example of investment 'risk'. You might buy something for yield, like REITs or preferred shares, and then still have a low 'total return'. I think it's healthy for everyone to be aware that high dividends and high yields do not necessarily translate to good returns.


i'm glad you brought up CEF because it popped into my mind after i made my post, i know it has been one of your favorites for a while

yes, high dividends and high yields should always be approached with caution (we had a poster not long ago who wants to sink an outsized amount of money into 2 reits merely because they are both offering very high yields at present, a really bad idea) 

of course, in the case of preferreds the yield isn't particularly high but it is solid (in theory) because it is stock in stable companies and of course it offers high income people (of which i am not one) the dividend tax credit as well as income unlike bonds

yes, we will agree not to embarrass ourselves by pointing out each others misses in full view of the forum :biggrin:


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## PharmD (Dec 21, 2011)

I think that with the continuing correction in the preferred shares market if a person investigates what they are getting into and are looking at it as a long-term rather than short term investment. I am nervous about preferred ETF's currently with rate reset's coming due, but I also believe there are some good deals for individual preferred's.

For example, I purchased Fairfax Financial's Series C for about $19/share. They have already reset their rate at the start of the year and my yield will be just over 6% until 2020. At that time either the rate will be reset increasing the yield further (assuming interest rates are higher at that time) or the shares are called and paid out at $25/share; either situation is beneficial to the holder of these shares. If interest rates sharply rise they can be converted to the floating rate D series which mitigates that risk as well. The only negative situation is if interest rates are even lower in 2020, but that is a pretty good risk to take I think.

That is just an example as there are many beaten down preferred shares right now. Just make sure to read the prospectus, look at a companies stability and don't risk buying into shares when they are resetting their rate soon. As a small part of a non-registered portfolio they can really make sense right now.


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## AltaRed (Jun 8, 2009)

PharmD said:


> For example, I purchased Fairfax Financial's Series C for about $19/share. They have already reset their rate at the start of the year and my yield will be just over 6% until 2020. At that time either the rate will be reset increasing the yield further (assuming interest rates are higher at that time) or the shares are called and paid out at $25/share; either situation is beneficial to the holder of these shares. If interest rates sharply rise they can be converted to the floating rate D series which mitigates that risk as well. The only negative situation is if interest rates are even lower in 2020, but that is a pretty good risk to take I think.


Very astute in my opinion, but then I agree with you. Getting into those that have just reset is a pretty good bet. That said, I don't want to load up on too many resetting agin within a short period in 2020. The concept should be to have a ladder of reset dats much as one would with a 5 year GIC ladder.


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## Rusty O'Toole (Feb 1, 2012)

You might look into convertible preferreds and convertible bonds. These are bonds and preferred stock that can be exchanged for stock at a fixed exchange rate. They offer the safety of a bond or preferred with the opportunity to take part in stock appreciation. Morton Shulman called them the ideal investment for widows and orphans.


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## agent99 (Sep 11, 2013)

Rusty O'Toole said:


> You might look into convertible preferreds and convertible bonds. These are bonds and preferred stock that can be exchanged for stock at a fixed exchange rate. They offer the safety of a bond or preferred with the opportunity to take part in stock appreciation. Morton Shulman called them the ideal investment for widows and orphans.


Convertibles may be great at times (I own a few), but at the moment, pickings are slim. Any actual names that we should look at?


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## dime (Jun 20, 2013)

AltaRed said:


> Over the long term, prefs will (should) outperform GICs handily, especially in taxable accounts.


Considering that over the long haul rates are expected to rise... any guesses as to when ZPR could recover it's losses and return to say the $14 to $15 level?

I've about 1% of my portfolio in ZPR where I entered during the 'taper tantrum' July 2013. Sadly that investment has behaved far worse I imagined since. Up till 2015 it was dropping in price at about -4% annual... since then the price has dropped almost another 18%. 

Based on my figures it's still yielding near 4% on my investment, but I'm concerned about the growing loss of capital value. 

I don't want to sell and lock in losses at the worst possible time at the very low. 

Any thoughts appreciated thanks.


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## AltaRed (Jun 8, 2009)

dime said:


> Any thoughts appreciated thanks.


Stay the course. As discussed above, reset prefs are in the doghouse right now because of the unexpected slide in GOC5 bond yield the past 12-18 months. GOC5 bond rates have nowhere to go but up. The world could (and will likely) look very different in 2-5 years. Remember these things are primarily bought for the income, as compared to anything else. Just like one would with a 5 year GIC ladder.


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## godblsmnymkr (Jul 15, 2015)

anyone have experience at tax time about how something like PGX would be taxed for a canadian in a non. registered account? there's no breakdown of their distribution found on the power shares site. 
thanks


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## gardner (Feb 13, 2014)

PowerShares Preferred Portfolio (PGX) is a US domiciled animal. Its yield is all just plain income, although you do get to claim the 15% withholding tax as foreign tax paid. I have a handful of PFF and the T3/T5 (can't remember which) that TDDI has given me looked fine.


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## tojo (Apr 20, 2009)

I have not posted here in a while, but this thread has sparked my memory of an incredible opportunity back in 2008 / 2009 where I bought up perpetual preferred shares (Brookfield, Power Financial, Sunlife etc.) and made a boatload of money on the combination of high yields and capital appreciation. For example, the investment grade Brookfield issue BAM.PR.J was purchased at $8 / share back in 2008, that collected a 13% yield at purchase and I watched that go to par ($25) and therefore collected an incredible total return. At the time, I thought it was a once in a lifetime opportunity. It was the greatest example of market inefficiency that I have seen. 

For those in the know, there is a similar (but not quite as good) opportunity currently with rate-reset preferred shares. I would advise to stay away from the ETFs as you will do better, given some of the market inefficiencies, by buying preferred shares from Enbridge, Brookfield, Shaw, Husky that are now deeply discounted that offer good current and calculated reset yields. I've purchased resets such as BAM.PR.X, ENB.PR.U, ENB.PR.H a few months back that, at the time, were good deals. They are an even better buy now that prices continue to decline. My thoughts are that were are close to a bottom on these and I am continuing to buy for long term holds.


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## godblsmnymkr (Jul 15, 2015)

nice comment.
its interesting the way preferreds in the usa have held up vs the ones in canada that have been decimated. really shows you the power of a negative sentiment on one index taking everything down with it. i have no experience in doing so but i imagine some preferred not related to energy or banking being good value right now.

thanks for the comment gardner. i will have to look into the value of investing into usa preferreds considering how they are taxed.


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## dime (Jun 20, 2013)

godblsmnymkr said:


> nice comment.
> its interesting the way preferreds in the usa have held up vs the ones in canada that have been decimated. really shows you the power of a negative sentiment on one index taking everything down with it.


I think its more than just negative sentiment. We've had two rate cuts by the central bank, and a significant portion of our preferred markets include rate resets which continue to reset for the next 5 years at the current low rates.


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## godblsmnymkr (Jul 15, 2015)

good point


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## agent99 (Sep 11, 2013)

tojo said:


> For those in the know, there is a similar (but not quite as good) opportunity currently with rate-reset preferred shares. I would advise to stay away from the ETFs as you will do better, given some of the market inefficiencies, by buying preferred shares from Enbridge, Brookfield, Shaw, Husky that are now deeply discounted that offer good current and calculated reset yields. I've purchased resets such as BAM.PR.X, ENB.PR.U, ENB.PR.H a few months back that, at the time, were good deals. They are an even better buy now that prices continue to decline. My thoughts are that were are close to a bottom on these and I am continuing to buy for long term holds.


I am interested and have looked at a few of these as potential replacements for corporate bonds that have matured. I have about $50k looking for a home. I have a few questions:

- Is there a site on line that lists rate resets along with their reset dates and reset formula?
- I read that Enbridge has been downgraded to pfd3. Is that really a problem? Still investment grade.
- Out of all the Enbridge resets, which one to choose? I have seen .U and .H suggested
- Out of ALL resets which ones to choose 

I have looked at prospectus's for ENB.PR.H, BAM.PR.X, BPO.PR.T, SJR.PR.A, SLF.PR.G, CPX.PR.A but only because others have said they have bought them recently.

I already have two split preferreds. Also considered LBS.PR.A, but that would add more financial exposure (already have a lot)


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## OnlyMyOpinion (Sep 1, 2013)

agent99 said:


> ...- Is there a site on line that lists rate resets along with their reset dates and reset formula?


Make sure you are intimately familiar with the nuances of the issues before you buy.
You do know about James Hymas' site? http://www.prefinfo.com/ and http://www.prefblog.com/

Most investment houses provide periodic pref share reports. For example TD Waterhouse has one dated July 31. I don't find a link to it outside of an account, but here is an older CIBC one (too old to be of much value - get something more current): 
http://www.cibcwg.com/c/document_library/get_file?uuid=823ffb68-e59e-45f0-817f-dcfc349fbdd6&groupId=92706

Also, read the Couch ptato writeup:
http://canadiancouchpotato.com/2015/03/17/does-your-portfolio-need-preferred-shares/
It links to PWL's report: https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2015-02-20_PWL_Kerzerho-Bortolotti_The-Role-of-Preferred-Shares-In-Your-Portfolio_Hyperlinked.pdf?ext=.pdf


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## pacman (Sep 6, 2009)

I've used this as a summary for prefs. 
Not sure if it has all the info you are looking for or not.

http://farstadretirement.com/content/uploads/daily-aug-7-2015.pdf


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## agent99 (Sep 11, 2013)

Thanks to you both. I used to get that Farstad report, but for some reason he stopped sending it to me. 

I am aware of James Hymas's site. Did have a look, but not being registered, limited info available.

I am trying to do my due diligence! Market doesn't seem to like the resets at present. Presumably because reset spread plus GOC5 rate is lower than investors are looking for at reset date?

Example. I buy a reset for $14.00 that will reset in say 3 years. It may pay, say 7% for 3 years. Pretty good!. Then it resets at say 200 points above GOC. If GOC is at 0.6%, then yield will be 2.6%. Not so good. But we only paid $14 vs $25, so effective rate is 4.64%. Not bad if GOC rates is still at 0.6%. But if it doubled to say 1.2%, post reset yield on purchase price would be 5.7%. What would corporate bonds be paying at that time? Probably about same? So perhaps market IS efficient - except we get the benefit of the high yield for first 3 years.

Does above seen like a correct analysis?


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## dime (Jun 20, 2013)

When the issue resets in three years at 2.6 the price will have fallen. Summer of 2013 I bought some RR prefs that reset much lower and the price dropped accordingly. You will need to figure in capital loss into your analysis. A drop of something like 30%+ is possible depending on all the factors


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## pacman (Sep 6, 2009)

agent

have you looked at any split preferred shares?
I own both DFN.PR.A and DGS.PR.A - discussed on another thread. Yield is just over 5%. Low beta. I much prefer these over true preferred shares, which I have owned in the past.

pacman


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## agent99 (Sep 11, 2013)

dime said:


> When the issue resets in three years at 2.6 the price will have fallen. Summer of 2013 I bought some RR prefs that reset much lower and the price dropped accordingly. You will need to figure in capital loss into your analysis. A drop of something like 30%+ is possible depending on all the factors


It is true that the price may drop further, although part of the reason for the present very low price is that the expected low yield on reset (and 5 years after that) is already discounted in. If you are not selling, it doesn't really matter what the current price is. I am coming to believe that the market price is fair (but not a bargain) compared with other offerings and that that will continue to be the case when viewed over long term.

With resets, the spread does not change. For example, GOC5 rate may over time increase 400% from say 0.6% to 2.4%. But spread remains same at 2%. So reset would be at 2.4+2=4.4%. Maybe that is still OK, especially if pfds were bought at a deep discount right now.

Pacman asked "have you looked at any split preferred shares?" Yes, I have and I like their relative simplicity and fact they are retractable. I own PIC.PR.A (holds major banks) and PVS.PR.B (holds BAM). Have been looking at DFN & DF as well as LBS and some other splits. Will also check DGS. Would like to see a review/comparison of all TSX splits. Anyone know of one?


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## gibor365 (Apr 1, 2011)

> Would like to see a review/comparison of all TSX splits. Anyone know of one?


 I also would like too 
SO far I just found that dividend of DFN.PR.A much more safe than DF.pR.A ...
Also I'm wondering how raise in interest rates , esp in US, gonna affect those splits.... they are retractable, so I assume with maturity most likely they will cost $10, and maybe when rates raises all splits will go down a bit and than better time to buy?


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## agent99 (Sep 11, 2013)

gibor said:


> I also would like too
> SO far I just found that dividend of DFN.PR.A much more safe than DF.pR.A ...
> Also I'm wondering how raise in interest rates , esp in US, gonna affect those splits.... they are retractable, so I assume with maturity most likely they will cost $10, and maybe when rates raises all splits will go down a bit and than better time to buy?


James Hymas wrote this article, but it was a long time ago. Hopefully he or someone will do an update:

https://www.google.ca/url?sa=t&rct=...CQM5ymUOQ&sig2=zv4YacBFmVOnwcTSkzjnSw&cad=rja

As rates in general go up, the split preferred prices will no doubt drop. But they are retractible and also mature at full face value just like a bond on a certain date. So if it is a $10.00 pfd and it's trading at $9.00, then at maturity you make a CG on top of the dividends paid. And of course, vice versa!


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## PharmD (Dec 21, 2011)

I'm really feeling tempted to add some more preferred shares right now, possibly Enbridge. Preferreds and REIT's both seem good value right now, but I don't want to stray too far from my asset allocation. Probably shouldn't fall into temptation.


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## agent99 (Sep 11, 2013)

PharmD said:


> I'm really feeling tempted to add some more preferred shares right now, possibly Enbridge. Preferreds and REIT's both seem good value right now, but I don't want to stray too far from my asset allocation. Probably shouldn't fall into temptation.


I have been adding to my preferreds. But only because there is so little in way of fixed income. I have also added to my convertible debentures. They are bond-like but for some beaten down companies, may offer some capital gains too. I am using these as fixed income proxies because my fixed income allocation is low. 

By the way, Enbridge preferreds were recently downgraded by the rating agencies. http://www.nexgenfinancial.ca/blog/enbridge-update-nexgen-canadian-preferred-share-funds/


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## dime (Jun 20, 2013)

I'm also interested in 'lower risk' assets with yield. But how do you know for certain when they 'undervalued'? The sector as a whole seemed undervalued in 2013 with the 'taper tantrum' and appeared to be good value with decent yields ranging from 4 to 6.5% at that time. 

Isn't it possible we could see another rate cut as Canada slides further into recession? Couldn't this add further capital losses and cause rate resets to drop further? 

I like the idea that I could try 'dollar cost averaging' and get some decent yield while I hold for the long term recovering in preferreds. 

As I've mentioned before, the loss in capital value I've seen on some of my preferred shares since I bought them has been significant from 20-40% on some issues. In hindsight I wasn't fully aware of the % in value to which rate resets would eventually sell off. I certainly never anticipated the rate cuts we had! I can only guess at the length of time it could potentially take to recover my capital (10+ years from now?)

The fear with perpetuals is they will lose value down the road as rates eventually rise, as was the case with the taper tantrum in 2013.

It's still a long time from now, but I imagine with an increase in rates, the rate resets with a low yield until the reset 3 or 4 years away would also likely be sold off a bit as investors look for higher yielding assets. 

Anyone have thoughts about determining value and assessing the risks in this asset class?


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## agent99 (Sep 11, 2013)

dime said:


> Anyone have thoughts about determining value and assessing the risks in this asset class?


First of all, I am no expert! But I was considering rate resets. Only plus I could see, was that you can get high yields up until the reset date (2-3 years out) Once reset, you are stuck for another 5 years at the reset rate (In some cases, you can convert to a floating rate - another guessing game)

My feeling is that the price of the resets has dropped for good reason. The market is telling us that they are only worth the 20-40% drop from face value that you have seen. If bought now at say $15, and reset is at say GOC5+2.5% then post reset, you will get a reasonable yield, but likely not more than a straight bond of equivalent quality. If they offered better yield, presumably they would be called? 

Too complex and too many unknowns for me. Using instead, either straight bonds, split preferreds with known retraction date at face value, and convertible debentures also with known yield and termination date (but also complex).

I would like to hear from experts where my thinking is flawed!


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## godblsmnymkr (Jul 15, 2015)

dime said:


> I'm also interested in 'lower risk' assets with yield. But how do you know for certain when they 'undervalued'? The sector as a whole seemed undervalued in 2013 with the 'taper tantrum' and appeared to be good value with decent yields ranging from 4 to 6.5% at that time.
> 
> Isn't it possible we could see another rate cut as Canada slides further into recession? Couldn't this add further capital losses and cause rate resets to drop further?
> 
> ...


take my advise with a grain of salt, but something like xpf.to has got to be irrationally low priced here. its main holding is PFF which is its american cousin. the price on pff has been very stable for awhile and is almost entirely made up of financials. the other main holding is another ishares fund cpd with a 4.5% weighting. only 18% of that is energy. 
i feel like a lot of canadian etfs and stocks are the baby getting thrown out with the bathwater. 
look at something like Dream Global Reit. 100% of its buildings are in germany yet its still coming down with the rest of the canadians reit sector. it really goes to show you that over all market sentiment is king. every other consideration is usually far less important.


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## andrewf (Mar 1, 2010)

If the pref is trading at a big discount, it is not in danger of being called. If a reset pref is trading at a big discount, to me, it must be because the credit risk is greater than the premium over the risk-free rate. I can't quite square why some resets are trading at huge discounts given 300 - 400 bpp premiums over BoC rates. Even if they reset at a low rate (with 5 yr BOC at <0.5%), they are offering pretty attractive yields, even without any price appreciation.


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## AltaRed (Jun 8, 2009)

The most heavily discounted fixed resets have reset formulae in the order of 120-200 bp + GoC5. The ones with the large(r) premiums are trading much closer to par and are the ones most likely to be called at par down the road.


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## godblsmnymkr (Jul 15, 2015)

http://www.theglobeandmail.com/glob...preferred-shares-is-alarming/article26194404/


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## agent99 (Sep 11, 2013)

godblsmnymkr said:


> http://www.theglobeandmail.com/glob...preferred-shares-is-alarming/article26194404/


Link doesn't work unless you pay G&M to register.


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## tojo (Apr 20, 2009)

agent99 said:


> I am interested and have looked at a few of these as potential replacements for corporate bonds that have matured. I have about $50k looking for a home. I have a few questions:
> 
> - Is there a site on line that lists rate resets along with their reset dates and reset formula?
> - I read that Enbridge has been downgraded to pfd3. Is that really a problem? Still investment grade.
> ...


Sorry I didn't respond...have been away on vacation but the knowledgeable folks here have chimed in and provided good info. I'm in a similar situation to you, where I have a fairly large sum to deploy after cashing in US/International equity index funds that have done well both from both equity and forex gains. I have been adding to fixed income to reduce risk, including rate reset preferred shares. I believe the downside is limited after being hit with the perfect storm of lower rates, downturn in Canada's economy and with issues such as Enbridge, downgrade in credit rating. 

With such a large sum, I would recommend staggering the reset dates so that you don't have them all reset in one particular year. I have mine laddered to 2016 / 2017 / 2018 / 2019 resets. You may have a problem finding investment grade preferreds to meet your objectives; I know I did, so I do carry some pfd3 rated shares that are a notch below investment grade.


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## godblsmnymkr (Jul 15, 2015)

agent99 said:


> Link doesn't work unless you pay G&M to register.




If you think the stock market has been nasty lately, you should check out what preferred shares have gone through.

It’s a slaughter, really. These supposedly low-risk widow-and-orphan stocks are in a bear market that looks much worse than what the broader market has been through. The S&P/TSX composite index was down 11.3 per cent for the 12 months to Aug. 31, while the S&P/TSX preferred share index was down 19.5 per cent. The composite has made 15.5 per cent in total for the five years to Aug. 31, while the pref share index is down about 21 per cent.

Sure, preferred share are primarily an engine for churning out dividend income. Preferred share defaults are not a problem, so investors have at least been getting the dividend payments they expect. But the decline in share prices has to be alarming. We have not seen mere volatility or dips in preferred share prices. What’s happening appears more like a reassessment of the entire asset class in light of current conditions in financial markets.

Part of the problem is that interest rates are low and could yet fall if the economy continues to struggle. The rate reset preferred shares that account for 60 per cent or so of the pref market were designed to reset every five years so investors could benefit from rising interest rates. Problem is, these shares can also reset to lower rates. Rate resets were a huge hit when introduced in 2008; now, they’re nearly a pariah product.

Low rates should be good news for perpetual preferreds, which pay a set dividend and have no set redemption or reset date. But even here, the pref market is weak. Of the 173 shares in the S&P/TSX preferred share index, not even one was in positive territory for the 12 months to Aug. 31.

Preferred shares were annihilated in the 2008-09 stock market crash, but stormed back quickly as the financial world settled down. What will bring the pref market back this time? Possibly the 5.5 per cent yield now being generated by the preferred share index. At a time when five-year Government of Canada bonds yield 0.75 per cent, that’s quite the value proposition.

Follow Rob Carrick on Twitter: @rcarrick


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## agent99 (Sep 11, 2013)

godblsmnymkr said:


> Possibly the 5.5 per cent yield now being generated by the preferred share index. At a time when five-year Government of Canada bonds yield 0.75 per cent, that’s quite the value proposition.


I seem to recall reading that the distributions of preferred index funds like CPD include ROC. Is this correct?


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## CPA Candidate (Dec 15, 2013)

I've been trying to tell people that preferred shares come with the risk of equity and the return of a bond + 2%. Call it return-free risk. Over the past 5 years the returns are GIC-like without sound sleep of a GIC.


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## tojo (Apr 20, 2009)

CPA Candidate said:


> I've been trying to tell people that preferred shares come with the risk of equity and the return of a bond + 2%. Call it return-free risk. Over the past 5 years the returns are GIC-like without sound sleep of a GIC.


I agree. When the economy is down, so are preferred shares. Non-investment grade get hit harder. Definitely not for the novice investor, as they carry both interest rate and economic risk. That said, I'm continuing to add to my positions.


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## scorpion_ca (Nov 3, 2014)

Is there anyone can explain why ZPR is trending higher whereas TSX is mostly down this week?


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## godblsmnymkr (Jul 15, 2015)

scorpion_ca said:


> Is there anyone can explain why ZPR is trending higher whereas TSX is mostly down this week?


technical reason looks like it got oversold. fundamentally i have no idea.


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## pacman (Sep 6, 2009)

godblsmnymkr said:


> If you think the stock market has been nasty lately, you should check out what preferred shares have gone through. The S&P/TSX composite index was down 11.3 per cent for the 12 months to Aug. 31, while the S&P/TSX preferred share index was down 19.5 per cent. The composite has made 15.5 per cent in total for the five years to Aug. 31, while the pref share index is down about 21 per cent.
> 
> Sure, preferred share are primarily an engine for churning out dividend income.


I agree the preferred share market has taken a beating. This is exactly why I moved over to the split preferred market, as I have mentioned in other threads.
I don't understand why these products are not more popular. It seems like a very good fixed income type alternative. Look at DFN.PR.A over the last 5 years. The low over the last 5 years was $10.00 (December 2013). It now trades at $10.28, as of today. No you will never realize any substantial growth or capital gain, but at 5%+ dividends (taxed as eligible divs), it does provide an excellent income product in my opinion. The beta is .05 for goodness sakes. It was sitting at 195% asset coverage at the end of July. Anyways, I think it deserves some consideration for anyone considering prefs.

pacman


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## james4beach (Nov 15, 2012)

Great, so you moved away from one complex vehicle rich with caveats, into another complex vehicle rich with caveats.

An older thread: http://canadianmoneyforum.com/showthread.php/14486-financial-15-split-corp-II

This is a dangerous game. There's no denying that these things can perform well, but there *are* caveats. They're exotic structures. And they're difficult to figure out... just like preferred shares, you need some level of in-depth expertise to figure out what's really going on.

This happened to people in 2007 too. Back then it was ABCP, ABS paper, and various derivative-based high yield funds.


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## pacman (Sep 6, 2009)

james4beach said:


> Great, so you moved away from one complex vehicle rich with caveats, into another complex vehicle rich with caveats.
> 
> An older thread: http://canadianmoneyforum.com/showthread.php/14486-financial-15-split-corp-II
> 
> ...


I agree the capital shares of the split are dangerous. I disagree on the preferred side. The NAV of the split share would have to drop by 50% for the preferred shares to be in trouble. These are not as complex as the other structured products you mention. James Hymas has been mentioned in the past here as the preferred share guru. I subscribed to his newsletter off and on over the past years. He has had some of these preferred split products on his recommended lists many times.


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## OnlyMyOpinion (Sep 1, 2013)

Sept. 4 Globe article by John Heinzl, *Why you can’t trust the yields on preferred ETFs*
http://www.theglobeandmail.com/globe-investor/investor-education/why-you-cant-trust-the-yields-on-preferred-etfs/article26231003/


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## humble_pie (Jun 7, 2009)

james4beach said:


> Great, so you moved away from one complex vehicle rich with caveats, into another complex vehicle rich with caveats ...




james4 i believe pacman is talking aboutl the Dividend 15 preferred shares? somehow you have segued into a different split financial issue? but the 2 are not the same.

i don't know FFN but i've owned DFN pfd for a few years. There are at least 2 cmf threads about it, both full of insightful commments.

this product uses options to boost its dividend payout for the common. The preferred is supported by the capital investments. From time to time the company raises more capital through a secondary offering. The offering examined a few years ago in one of the cmf threads stated that the proceeds of the offering would be used to support dividends on the preferreds.

there was a misleading news release at the time which stated that all dividends, both preferred & common, were to be supported.

however, the prospectus itself was crystal clear that only the preferred were to benefit from the additional capital to be raised. It's the prospectus that is the binding legal document. A news release is just a throwaway, although a company is supposed to strive to be accurate.

alas reading a prospectus is not everyone's cup of tea, so this means a significant amount of research for investors. Back in the day when i had financial advisors, i never knew even one that would bother to read a prospectus! they read marketing summaries & news releases only, tch.

one of the threads on DFN.PFD vs DFN common has recently been exhumed & re-discussed in cmf. There are useful comments in that thread & of course there are a few inaccurate comments. The recent consensus seems to be that the preferred dividend is reasonably safe until 2019, when the covenants mature.

as pacman says, the DFN preferred share price has trudged on for years within a tight band around $10 & with a steady yield just north of 5%.

all that being said re this one issue, in general james4 i believe you are 100% accurate in suggesting that folks should look carefully under the hood of any income product they buy, including any & all ETFs, not just individuated securities products such as the DFNs. One can assume that any investment promising to pay high income is goosed up with options trading, junk bonds, representational sampling, ROCs, swaps or futures.


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## james4beach (Nov 15, 2012)

Thanks humble_pie, I did not realize these were two different things. When I saw "split" I thought we were talking about the same thing.

Yes I think people need to be very cautious with investments I'd call "exotic". We all know how stocks and regular bonds work. But complex debt structures (like new types of junk bonds) and complex equity structures etc are just not very simple. Neither are the ETFs that wrap them together, and you have pointed to the suspicion of these ETFs for some time.


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## agent99 (Sep 11, 2013)

james4beach said:


> Yes I think people need to be very cautious with investments I'd call "exotic". We all know how stocks and regular bonds work.


Regardless of what we invest in, it does require us to read and understand the prospectus. 

Stocks may be easy to understand. But which ones to buy? That would require a good knowledge of accounting to review the staements as well knowledge of the business the company is in. To me, that is quite a challenge and I am sure many of us just don't do our due diligence on stocks.

Bonds should be easier to understand. But without reading the prospectus, an investor might not realize how and when the issues may be called. Bond etfs or funds are another thing. Does everyone buying them understand, for example, duration?

For dividend etfs or funds, we need to dig out and find out the make up of distributions. The issuing companies don't make this easy. How much of that distribution is a dividend and how much ROC or CG? You won't find that in the prospectus!

Regardless of what security we are investing in, we need to understand it. I don't see that preferreds, splits or even convertible debentures are any more exotic than etfs, mutual funds or individual stocks and bonds, provided you read and understand the prospectus. I do stay away from covered calls, because I have not taken the time to understand them and am not a gambler


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## gibor365 (Apr 1, 2011)

> I don't see that preferreds, splits or even convertible debentures are any more exotic than etfs, mutual funds or individual stocks and bonds, provided you read and understand the prospectus.


 True! I know that segregated funds is very popular in Canada (very surprised why, because it's the worst investment possible) , but practically no one understand them (I have exposure to them at my job)...


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## stantistic (Sep 19, 2015)

*stantistic*

In hindsight, the sharp and steady drop in price of some preferred shares and of CPD was predictable (ie rate reset). My question is did any pundits in the Canadian media a) predict the drop in say Jan. 2014 and b) explain it on the way down ?


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## stantistic (Sep 19, 2015)

stantistic said:


> In hindsight, the sharp and steady drop in price of some preferred shares and of CPD was predictable (ie rate reset). My question is did any pundits in the Canadian media a) predict the drop in say Jan. 2014 and b) explain it on the way down ?


I have since found stockchase.com . The answer appears to be no, at least for the half dozen pundits writing there about CPD. Although some of them said "don't buy " for other reasons.


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## leslie (May 25, 2009)

stantistic said:


> In hindsight, the drop in price of preferred shares was predictable. Did any pundits predict and explain it on the way down ?


 They have been 'explaining' it since early this year --- all the same way, which you seem to agree with - _"When interest rates fall, RateResets fall in value because they reset with smaller $coupons."_. But I strongly disagree with that 'reason' When rates fall, the price of debt RISES. This is a universal truth. See the thread on this issue at http://canadianmoneyforum.com/showt...Shares-fall-in-price-when-interest-rates-fall Prices fall when rates rise, and the risk premium of Corporate debt has risen this year. A recent article in SeekingAlpha http://seekingalpha.com/article/358...ets-telling-asset-allocators#comment-62213656 addressses the issue of the rising credit spread (I would think same thing happens in Cda as US) without coming to any clear conclusion about its cause.


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## pwm (Jan 19, 2012)

Prefs seem to be getting some love in the last few days for some reason. CPD is up around 8% in the last 5 days. My perpetuals are also going back up again.


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## godblsmnymkr (Jul 15, 2015)

they were oversold. xpf hit its resistance trendline today. the move now will be to wait and see what happens. if it can consolidate a bit and then move up it might be a good time to buy.


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## pwm (Jan 19, 2012)

Oversold for sure. I bought 600 POW.PR.D last week at $21.75 which was around a 5 year low. The yield at that price was about 5.75%.


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## stantistic (Sep 19, 2015)

*Yield to worst*

To those members who frequently deal with preferred shares, where do you obtain YTW ?


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## avrex (Nov 14, 2010)

For the YTW (yield to worst) for Fixed-Reset Rate Preferreds, I use the Yield Calculator for Resets excel spreadsheet from the James Hymas website. 
In the spreadsheet, you make an assumption of the GOC5 at reset and then evaluate the long term yield if held for 30 years.


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## stantistic (Sep 19, 2015)

Thanks avrex. May Santa Claus drop a sugar plum in your stocking.


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## avrex (Nov 14, 2010)

:encouragement:


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## stantistic (Sep 19, 2015)

*YTW of BMO.PR.W*

In his blog dated July 5, Hymas has a yield to worst of 4.1% for the above at a bid price of $18.29. What inputs would he be using in the Shakespeare-Hymas calculator to get that result?


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## Woz (Sep 5, 2013)

@stantistic

Current Price: $18.29
Call Price: $18.29 (he uses a call price equal to the current price because he only calculates out 30 years and it may not be redeemed in that time)

Settlement Date: 2016/6/30 (current date)
Call Date: 2046/6/30 (current date plus 30 years – 30 years is a limitation in his spreadsheet)

Quarterly Dividend: $0.2375 (given in the prospectus)
Cycle: 2 (Div paid Feb/May/Aug/Nov - from prospectus)
Pay Date: 25 (Div paid on the 25th of the month - from prospectus)
Include first dividend: 1 (because you get the Aug dividend)
First dividend value: blank (the dividends are the same)
Reset Date: 2019/11/25 (from the prospectus)
Reset Spread: 2.2% (from the prospectus)
GoC5 yield assumption at call (%): 0.60% (GoC5 yield on June 30th, 2016 – Major assumption could easily change by 2019 causing much different YTW)

That outputs a Current Yield of 5.19% and a yield to call of 4.10%. Yield to call is your YTW in this case. If current yield was lower than yield to call or if current price was >25 then you’d need to rerun the analysis for a call date of 2019 and a call price of $25 to check your YTW.

The call price and GoC5 yield are major assumptions which could change your YTW.


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## stantistic (Sep 19, 2015)

Thanks Woz. 
Where I was getting hung up was on what call price to use - but today’s price is as good as any.


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## like_to_retire (Oct 9, 2016)

The federal reserve raised rates a quarter point yesterday, for only the second time in a decade. Then the Canadian Banks raised some mortgage rates again.

So today, I see a ridiculous jump in share price of all my low spread preferred share resets to the tune of 2% to 3.75%. Sadly, they have all suffered horribly as rates have dropped over the last few years. But, the high spread resets I own didn't budge on share price, and this makes sense considering they would not be deemed candidates to reset, rather they are simple 5 year money. On the other hand, the low spreads would definitely reset, and it would be at a higher rate if the interest rates were higher. The math makes sense.

What amazes me is that this wasn't already baked in. Why the large reaction to something we knew was about to occur? This tends to prove that Prefs are truly a retail product and there's money to be made from the uninitiated.

ltr


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> What amazes me is that this wasn't already baked in. Why the large reaction to something we knew was about to occur? This tends to prove that Prefs are truly a retail product and there's money to be made from the uninitiated.


Same observation this morning. Go figure.....! That said, ST bond yields have moved too and that is where the sophisticated gurus play.


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## Argonaut (Dec 7, 2010)

The only advantage to preferred shares is that they get a claim on dividends before common equity. If this is actually a meaningful consideration then you probably shouldn't be anywhere near the stock in the first place. I think preferreds are something that investors can safely ignore. Worst of both worlds between debt and equity.


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## mordko (Jan 23, 2016)

As Ben Graham said, preferred shares are only ever worth considering if they are at least 30% under par. 

The other factor is that it's fixed income which has advantages in terms of taxation in a non-registered account, but that's letting your tax tail wag the investment strategy.


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## AltaRed (Jun 8, 2009)

Maybe. Many investors have insufficient room in registered accounts for fixed income. Thus I choose to have 6-8 or so prefs in my taxable account to provide dividend income. Some are true perps and some are fixed resets. I also don't step down in credit quality, e.g. no ALA, BAM, etc. prefs. Better than dividend paying cyclic commons like commodity/resource stocks.


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## like_to_retire (Oct 9, 2016)

I agree with Alta. If you have fixed income in non-registered accounts as a result of asset allocation requirements, then preferred shares can really boost your after tax income. 

ltr


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## P_I (Dec 2, 2011)

mordko said:


> As Ben Graham said, preferred shares are only ever worth considering if they are at least 30% under par.
> 
> The other factor is that it's fixed income which has advantages in terms of taxation in a non-registered account, but that's letting your tax tail wag the investment strategy.


There are enough differences between tax treatments for US investors in US preferred shares and for Canadian investors in Canadian preferred shares which probably render Ben Graham's viewpoint on this subject moot for Canadian investors.


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## doctrine (Sep 30, 2011)

Most rate reset preferred shares, especially Canadian ones (which have the tax credit), are trading at very high discounts. The discount is so high at sometimes more than 50%, that they represent outstanding exposure to rising interest rates. Whether or not you actually believe in rising interest rates, you could use them as an offset for long term bonds and potentially lock in some meaningful absolute return on investment grade companies.


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## mordko (Jan 23, 2016)

P_I said:


> There are enough differences between tax treatments for US investors in US preferred shares and for Canadian investors in Canadian preferred shares which probably render Ben Graham's viewpoint on this subject moot for Canadian investors.


There is also a bit of a time lag; financial tools do go through changes. And yet it is impressive that his logic works just the same today in Canada as it did years ago in the US.


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## treva84 (Dec 9, 2014)

doctrine said:


> Most rate reset preferred shares, especially Canadian ones (which have the tax credit), are trading at very high discounts. The discount is so high at sometimes more than 50%, that they represent outstanding exposure to rising interest rates. Whether or not you actually believe in rising interest rates, you could use them as an offset for long term bonds and potentially lock in some meaningful absolute return on investment grade companies.


Care to share your suggestions? :smile:


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## Eder (Feb 16, 2011)

I don't consider preferred shares "fixed income"...all the risk of underlying equity.


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## like_to_retire (Oct 9, 2016)

Eder said:


> I don't consider preferred shares "fixed income"...all the risk of underlying equity.


Well, not really _all_ the risk of the underlying equity. Prefs are senior to the equity and subordinate to the bond in regard to rights of company assets, and prefs will usually maintain their dividend according to the prospectus, while the equity can raise or lower the dividend at will. A company is certainly loath to lower or drop a dividend for their equity, but it's a huge problem if there's an attempt to drop a pref dividend.

So they're considered more of a hybrid, and even more-so after the introduction of rate resets. Perpetuals were much closer to fixed income since their income was fixed forever or until a call, but resets change their fixed income every 5 years or until a call. They're a decent proxy for fixed income in a non-registered account.

ltr


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## stantistic (Sep 19, 2015)

*Rule of thumb*

I own a few 5 year resets which are trading at above what I paid for them and in some cases slightly above par. The decision I am required to make is whether to sell them now and take capital gains and reinvest in preferreds at the going current rates or wait and enjoy the good yield relative to what I paid for them. If I wait, the premium will evaporate away by reset date.

Hymas in Prefblog had some comments on this subject on about April 10th, but I was unable to distill a rule of thumb to guide me.

Any comments?


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## AltaRed (Jun 8, 2009)

What James would do as an operator of a fund might be different than what a retail investor might do, i.e. your individual tax rate for cap gains vs eligible dividends. Figure that out and that might guide you on whether to continue to clip the dividend or grab the cap gains.

Secondly, the premium may not totally evaporate by reset date. It would evaporate IF the market sentiment is that the reset would be called by the issuer. If not, then the market price on reset date may well be a hunch on the premium the issuer is prepared to continue with. After all, it costs the issuer money to call existing prefs and to issue a new series.

Personally, I prefer to buy prefs at a discount (low spread) and have them stay at a discount. On the off chance they are called for a particular reason, there's a surprise chance at a healthy cap gain. YMMV


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## stantistic (Sep 19, 2015)

Thanks AltaRed.
I'll consider the tax credit for dividends as roughly offsetting the capital gains exclusion rate for capital gains and leave things be. Then I'll let the Great Gods of the Marketplace decide on what to do at the next rate reset time.


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## Nerd Investor (Nov 3, 2015)

Is there a particular screener / resource that lists Canadian prefs?


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## AltaRed (Jun 8, 2009)

I believe there are a number of sources for lists of prefs. James' prefinfo.com is one. I know of no screener because prefs are complicated and varied in type and strategy (straight perpetuals, high spread resets, low spread resets, floating resets, resets with floors, etc).


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## Nerd Investor (Nov 3, 2015)

AltaRed said:


> I believe there are a number of sources for lists of prefs. James' prefinfo.com is one. I know of no screener because prefs are complicated and varied in type and strategy (straight perpetuals, high spread resets, low spread resets, floating resets, resets with floors, etc).


Thanks


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## stantistic (Sep 19, 2015)

The following brokerage has information grouped by types.
http://www.credentialdirect.com/default.aspx 
You may need membership in the brokerage to see it though.


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## like_to_retire (Oct 9, 2016)

Nerd Investor said:


> Is there a particular screener / resource that lists Canadian prefs?


Scotia releases a pretty good guide every year that list and explains the various types and some examples.

Scotia Preferred Share Guide.

ltr


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## Jaberwock (Aug 22, 2012)

This is a good website for preferred shares:

http://www.investingforme.com/data-room/perpetual-preferred-shares

Preferred shares are more complicated than you might think. If the price is above the recall price (usually $25), you may end up having the shares recalled for less than you paid. Use the "yield to recall" rather than the current yield when deciding to buy perpetuals. 

Prices of perpetuals will very likely fall if interest rates rise. However, prices of some floating rate and rate reset shares will rise with rising interest rates. You can hedge against rising rates by including some of those in your portfolio.

Re


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## Brin68 (Aug 25, 2016)

I have sold some of my higher priced resets that I own recently and taken the capital gain ( have losses to offset this). ie TD.PF.G, NA.PR.X. I am under the assumption that due to the high reset spreads these will be called on the reset date. The present Yield to Reset for TD.PF.G and NA.PR.X is 3.16 and 3.28% respectively. I have replaced these with higher yielding preferreds.


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## joetheneighbour (Apr 17, 2017)

I don't have much experience with preferred share but I own BBD.PR.C. Can someone give me some advice rather or not this is a good stock to keep?


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## stantistic (Sep 19, 2015)

joetheneighbour said:


> I don't have much experience with preferred share but I own BBD.PR.C. Can someone give me some advice rather or not this is a good stock to keep?


Here is one opinion.

http://www.fool.ca/2017/04/13/bombardier-inc-whats-going-on/


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## OnlyMyOpinion (Sep 1, 2013)

joetheneighbour said:


> I don't have much experience with preferred share but I own BBD.PR.C. Can someone give me some advice rather or not this is a good stock to keep?


This is a perpetual pref, current price $18.20, yield 8.59%, rated P-5 (junk - defined as highly speculative with ability to maintain dividend and principal payment highly uncertain) which explains the high yield.

Keep? It depends on the terms of your overall financial plan - why did you buy it in the first place? Are you primarily in income mode rather than growth? What % of your total portfolio does it represent? If you sold it would you realize a cap gain, is there a loser that you should be selling that would offset the gain? What would you do with the proceeds, etc ...


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## AltaRed (Jun 8, 2009)

Agree that we have no context on why it was bought in the first place and how it fits into the overall portfolio. However..... when buying junk, one should be buying it in a 'fund' or similar to spread the risk and reduce the damage in event of default. While it is doubtful QC or Canada would let BBD go bankrupt, there may be a situation where a default on the commons and prefs could occur. Most people know the company is barely solvent. I suspect the OP does not fully understand the complex world of prefs and probably should not be in any of them.


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## Nerd Investor (Nov 3, 2015)

I purchased BBD.PR.C at a significant discount almost exactly a year ago for about $13.18 as a safer way to play upside (safer being a relative term compared to the common shares) and benefiting from the extremely high yield. It's been one of my best performers in that time, currently up about 38%, and has yielded almost another another 12% on my cost. I've thought about cashing out, but with the current yield still quite high I think I will continue to wait it out a while longer.


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## OnlyMyOpinion (Sep 1, 2013)

Good call, great results. I don't think we're saying not too own, just know what you own, what your exposure/risk is, and how it fits into your overall plan. 
I agree with AR that BBD has always been successful going to the government trough and may be unlikely to go belly up - and that is not to say the gov't shouldn't support some industry sectors in some situations but with BBD it seems part of their business (and renumeration) model.


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