# iShares S&P/TSX Canadian Pref Share (CPD)



## bmoney (Jun 22, 2013)

This is my current next big idea, I bought the dip at $11.43 and bought a bit more last week. The dip in the USD, and oil rally has given commodities a bid and in turn some confidence in Canada. With BoC concern about housing indebtedness and a commodity rally, another rate cut will be shelved - rate-reset prefs will rebound. If the US economy continues to remain firm, the Fed will talk about tightening again later this year. There are just so many ways to win which is why I love CPD.

Thank me later


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## james4beach (Nov 15, 2012)

CPD has under-performed the TSX for many years now. Is there a particular reason you think will turn around now or why you think CPD is a better bet than the TSX index? From the iShares ETF performance pages, average 5 year returns

XIU 1.33%
CPD -3.93%


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## Chris L (Nov 16, 2011)

Bought a big chunk of CPD a short while ago at $11.74. Pays out monthly. Near as I can tell it's bottomed out with a lot of upswing potential. If things normalize I would guess it would go up 40% or so while paying out handsomely. I bought if for the monthly yield though and not the capital gains....which I'm fairly certain will come. We just need to shake off all these low rates and get the economy humming again.


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## LongShorts (Feb 18, 2016)

I've been eyeing up CPD for a week or so now. It's bouncing along the bottom right now and all signs point to a climb. Dividend yield currently sitting at 5.49%....I'm just debating on more XIC or some of CPD.....decisions decisions....


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## tygrus (Mar 13, 2012)

CPD has burned many an investor in the past few years. It does exactly the opposite of what it should. 

These preferred may have stable dividends but the underlying price is not stable. They are subject to rate resets and interest rates. Also, big companies issue preferred shares to compensate management who promptly sell them and pocket the cash. So the price is diluted by issuing more stock and then its given away and then sold. In a way, you are directly funding directors bonuses.


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## AltaRed (Jun 8, 2009)

The only reason CPD has been a dog over the past several years has been declining bond yields. In the early(ier) years, no one knew the financial crisis was coming nor that interest rates had to come down to save the economy. The assumption back in 2006/2007 was the bull market in bonds was over and interest rates 'had to increase'. Similarly, in the wake of the financial crisis, everyone believed interest rates just had to go back up sooner rather than later. Wrong on both counts.

That said, can 2-10 yr bond yields get any lower than they already are? Logic would say NO and thus CPD (and ZPR) will have to winners 'soon'. The question is 'how soon' and perhaps more ominously, IF we are heading into stagflation and Canada cannot re-start its economy, the wait may be longer than one can stay solvent.

Both my ex (CPD) and myself (individual issues) have suffered over the past few years but now is not the time to bail. The bottom may well be in. The whole premise for holding prefs is the attractive yield and eligibility for the dividend tax credit in non-registered accounts, especially for those that don't have the room to shelter 'fixed income' in registered accounts. That premise has not changed but it is going to take some time yet to get back to ticker prices prevalent back in 2007 or so.

Prefs are not for the faint of heart and most retail investors probably shouldn't venture into this market without their eyes wide open. This is a long term investment and most retail investors have angst beyond a year or two.


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## bmoney (Jun 22, 2013)

AltaRed provides a good summation. I will assume the reader understands how prefs and rate-reset pref shares work. 

CPD is comprised of 2/3 rate-reset prefs and about 1/3 perpetuals. There has been a massive repricing of rate rests for a wack of different reasons including new issues of higher yield pref shares. This is putting pressure on CPD, and the market seemed to wake up to a lower for longer rate environment at the start of 2015, hence why CPD has been utterly crushed. But you have a chance to buy quality now after the damage is already done.

Blackrock provides a great sensativity analysis on CPD yield assuming a 5 year BoC yield of 0.75%. Between 2016-2019, CPD yield would decrease from 5.18% today to 4.68% in 2019. That's pretty good for investment grade fixed income, and way above the normal spreads. I believe spreads to be wider than during the depth of the financial crisis. The point is CPD is priced for panic, and as panic subsides spreads will narrow, CPD yield will decrease as the par value of the pref shares and CPD stock price rises.

For some context, the BoC 5YR hit a 10 year low of 0.48% in early February 2016 - BOC website doesn't provide data beyond 10 years. Today it has rebounded to 0.71% and over the past 24 months it has averaged just 1.12% with a high of 1.78%. Rates hit the floor this year, and I believe things will begin to normalize again. If I'm wrong I can sit back and collect a tax-advantaged yield until rates rebound. I doubt we will see negative 5 year yields ever but I could be wrong and that's a risk I will accept.

Also there are rumours that banks may buy back rate-reset prefs as they are not eligible as tier-1 capital providing an immediate lift in share price.


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## AltaRed (Jun 8, 2009)

Somehow i doubt the banks will buy back any of the plethora of the 'new' NVCC compliant fixed rate resets any time soon. They are still buying back all the old(er) (since 2008) high spread non-NVCC compliant resets issued in the wake of the financial crisis. What will likely happen is the new resets with a minimum floor and high spreads will be called when they can be in 4-5 years with lower spread issues (as the BoC5 rate goes up). Those buying those rich resets right now should see them as only 5 year money.


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## andrewf (Mar 1, 2010)

How would that work though?

The issuer can only call at par ($25) or buy back from the market. If the 5 year BoC rate normalizes in the 3% range, all these issues at +300 bps will be yielding 6% of par, and in many cases near 10% of market price. To me, that implies far too large of a credit spread.

Worst case scenario is that rates remain low (0.5% 5 year BoC), and these prefs reset in the 3-4% yield on par range, or in the 5-6% yield of where they are trading now. 

Other plausible scenarios/considerations (that would only serve to increase returns):

-bond yields rise somewhat and these prefs reset at even higher yields on present value (I'm assigning a low to moderate probability on this scenario). 

-the price of these issues rise closer to par value. Maybe even over par, at which point they are called by the issuer. In this case, we're often looking at 50 - 100% upside in capital appreciation. Even if they take 10 years to be called, that adds a significant return on top of the cash flow. 

It seems to me that a lot of these fixed reset preferred shares that have been beaten down lately are offering rather attractive expected returns. A minimum of 5% to upwards of 10% annualized. The biggest risk is that the issuer fails and the equity holders are wiped out. For a lot of these companies, it doesn't seem terribly likely. 

Say BCE-O. It has a reset of +303bps and will be resetting in a few weeks at presumably 3.7% of par, or 93 cents per year. It traded at 18.00 today, giving a post-reset yield of 5.1% for the next five years. If BoC rises to 300 bps in 5 years from now, the yield will reset at 8.3% of the current price. If the share price rises to $25 (and is redeemed) by the time of the next reset, that is a 25/18=38% capital gain, of 6.8% annualized. Put the two together and you're looking at 12% return if it is called away in 5 years, or worst case 5% yield indefinitely, with a good chance of that yield increasing in future.


What am I getting wrong here?


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## andrewf (Mar 1, 2010)

Case in point... Riocan Preferred A

https://www.google.ca/finance?q=TSE:REI-A&ei=-mjfVrmCB4SVjAGihJ_IBw

http://www.stockhouse.com/news/pres...trust-announces-redemption-of-cumulative-rate

Riocan opted to redeem this series (at $25), despite the fact it was trading at $15.50 before the redemption was announced. Instant 60% return. Any insight as to why management would do this?


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## AltaRed (Jun 8, 2009)

http://business.financialpost.com/i...-of-preferred-redemption-rona-and-riocan-reit


> Cynthia Devine, RioCan’s chief financial officer said the company redeemed because: It gets no equity credit for the security; it has made debt reduction a priority; and it can borrow at a lower rate than it would be required to pay for extending the pref shares another five years.
> 
> On Friday, Devine said RioCan “did look at that [a tender offer below $25] but there was a chance that not all of them would be taken out of circulation. Some [investors] may not tender so you have a series outstanding.”


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## bmoney (Jun 22, 2013)

andrewf I think you're on the right track. Sounds too good to be true, doesn't it? There seems to me three main risks on this trade 1) Interest rates go lower 2) new issues at higher yields/spreads 3) company specific risks. I feel that the risk reward is acceptable, and the negative consequences of lower for longer interest rates is not necessarily favourable for stocks either, just look at Japan over the last 30 years.


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## Chris L (Nov 16, 2011)

You can go pretty deep on the analysis on this one...but just ask yourself if you think things will get worse for CPD or better over the next 10 years. Seems to me that we're pretty much at rock bottom. If CPD can't turn out moving forward, nothing else really matters.


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## tojo (Apr 20, 2009)

I've been buying heavily rate resets last couple of months. In the last few days I'm actually in the green with the nice move up for most reset shares. The following essay from pref guru James Hymas provides good insight to resets: http://www.himivest.com/media/impliedVolatilityFixedResets_2016.pdf , with emphasis on the formula on page 5, it explains the factors at work, why current pricing is so low, what it may take for rate reset shares to rebound. If I'm reading it correctly pricing is a function of: GOC 5yr rate, the issue's rate reset spread, company credit quality, and current market conditions. In the current environment, the low GOC 5yr rate and poor market conditions (fear of corporate bankruptcy) are the main drivers and the root cause of low preferred prices. Once the current crisis gets better, monetary policy will tighten (i.e. rates will go up) and credit spreads will decrease. Using the volatility excel spreadsheet in the link, its apparent that low pricing is not just the result of low GOC 5 rates, but current huge credits spreads that should narrow as the economy and oil situation gets better. Also explains the the large discounts in pricing we see for issues with low reset spreads (e.g. TRP.PR.B at the extreme). An increase in the GOC 5yr, even to 2.5%, would serve as a great equalizer and bring many of these resets close to par. Volatility should be lowered as the GOC5 increases. Hope this makes sense...those in the know please chime in or correct if I'm off base. In no way should these things be considered fixed income. There is too much risk and volatility - that said, the potential for big gains is there should the GOC5 goes even a bit higher and economy gets better. I'm a buyer of VSN, HSE, ENB etc. prefs. I don't hold any CPG, ZPR or any of the recent issues with the high resets that will no doubt be called in 5 years time.


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## tojo (Apr 20, 2009)

Chris L said:


> You can go pretty deep on the analysis on this one...but just ask yourself if you think things will get worse for CPD or better over the next 10 years. Seems to me that we're pretty much at rock bottom. If CPD can't turn out moving forward, nothing else really matters.


I would say the risk profile for resets / ZPR / CPD is asymmetrical. Can it go down? For sure, but upside potential far greater at this point. I think it all depends on oil. Rate resets, to me, are a proxy for oil. I see it as a more conservative (but not risk free) way to play oil and resources. When you look at resets at par, the risk profile reverses. I have sold all my perpetual prefs that have gone to par from the Great Recession of 2008/09.


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## james4beach (Nov 15, 2012)

I just really feel like a forward going total return on this would probably match XIC, at best.

Why not just cut out the weird complications and go straight to XIC or ZCN? If there's a turnaround, the TSX Composite will perform well.


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## tojo (Apr 20, 2009)

james4beach said:


> I just really feel like a forward going total return on this would probably match XIC, at best.
> 
> Why not just cut out the weird complications and go straight to XIC or ZCN? If there's a turnaround, the TSX Composite will perform well.


When I sold my last perpetual pref in Dec. 2015, my annualized return over 7-8 years was 10.5% on a 6 digit pref portfolio. These resets have the potential to beat that given the price points I'm buying them at compared to 2008/9. l'm not sure I can do that with XIC.


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## james4beach (Nov 15, 2012)

I see what you're saying, but this amounts to a sector gamble of sorts.

You're basically saying, I believe there will be a TSX rebound and I believe that CPD will experience it stronger than the broad index


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## tojo (Apr 20, 2009)

james4beach said:


> I see what you're saying, but this amounts to a sector gamble of sorts.
> 
> You're basically saying, I believe there will be a TSX rebound and I believe that CPD will experience it stronger than the broad index


Somewhat, but let me clarify that I won't buy CPD or ZPR. With the control I have buying individual prefs, knowing the reset terms, embedded options etc. I can do well and perhaps beat the index, and in the interim collect massive income as I wait for a recovery.


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## james4beach (Nov 15, 2012)

tojo said:


> Somewhat, but let me clarify that I won't buy CPD or ZPR. With the control I have buying individual prefs, knowing the reset terms, embedded options etc. I can do well and perhaps beat the index, and in the interim collect massive income as I wait for a recovery.


So you'll be doing better than the preferreds traders at Blackrock and BMO? Very possible and I certainly wish you good luck


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## tojo (Apr 20, 2009)

james4beach said:


> So you'll be doing better than the preferreds traders at Blackrock and BMO? Very possible and I certainly wish you good luck


Thank you James. For some freaky reason, I did very well with the beaten down prefs from last recession. How I translate that success to rate resets remains to be proven.


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## andrewf (Mar 1, 2010)

james4beach said:


> I just really feel like a forward going total return on this would probably match XIC, at best.
> 
> Why not just cut out the weird complications and go straight to XIC or ZCN? If there's a turnaround, the TSX Composite will perform well.


Not sure I agree. XIC has the potential to draw down by 50% from here, I would be pretty surprised to see these rate resets to draw down by that much, we would see yields upwards of 10% in that case.


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## andrewf (Mar 1, 2010)

james4beach said:


> So you'll be doing better than the preferreds traders at Blackrock and BMO? Very possible and I certainly wish you good luck


Prefs are one market where there are many smaller, illiquid issues that may not be captured by big funds.


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## bmoney (Jun 22, 2013)

Nice pop today, so other than me, who is making money on this?


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## doctrine (Sep 30, 2011)

I hold some XPF, which is 50% Cdn prefs and 50% US prefs. It has performed very well but might not snap back as fast as CPD as US prefs have done very well comparatively.


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## Chris L (Nov 16, 2011)

1700 shares here. Doing just fine as I bought a while ago. What's not to like?


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## tojo (Apr 20, 2009)

bmoney said:


> Nice pop today, so other than me, who is making money on this?


I don't own CPD, but preferred share portfolio doing extremely well year to date: great dividends and nice capital appreciation last few days. No complaints for now....


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## Chris L (Nov 16, 2011)

Question: Does an increase in capital gains (stock value) mean anything toward the dividend payout for CPD? As in, as the stock itself becomes more valuable, do I get a better yield? My hunch is no, but set me straight....


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## mordko (Jan 23, 2016)

Chris L said:


> Question: Does an increase in capital gains (stock value) mean anything toward the dividend payout for CPD? As in, as the stock itself becomes more valuable, do I get a better yield? My hunch is no, but set me straight....


CPD is dominated by rate resets. Yield is defined by interest rates. As investors anticipate a fall, price goes down because the yield will. And the other way around. So... The answer to your question is "yes there is a correlation, but it depends on interest rates/long term bond returns". Because investors may have guessed wrong. In the short term yield will actually go down as the dividend in dollar value will not change.


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## james4beach (Nov 15, 2012)

Chris L said:


> Doing just fine as I bought a while ago. *What's not to like?*


What's not to like is that you're getting a worse total return than the TSX index.

to the end of March, average annual returns from iShares (_these total returns include dividends_)

1 year return: CPD -15.99%, XIC -6.59%
3 year return: CPD -6.95%, XIC +4.91%
5 year return: CPD -2.33%, XIC +1.92%

In what world is this good? These are horrible total returns.


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## AltaRed (Jun 8, 2009)

You are not supposed to get better returns in the pref market than the common equity market. Prefs serve a different purpose in a portfolio. Some classify prefs as fixed income, while others put it in an asset class by itself. The issue in the last 3 years is most bet on increasing yields on 5 yr GOC bonds for the fixed reset market. Instead, yields fell even further. Over the long term, prefs will be just fine. They are just in a funk right now.....just like the S&P500 was for Canucks most of the first decade of this century.


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## doctrine (Sep 30, 2011)

In 10 years, if 5 year interest rates return to 3-4%, then CPD could see up to a 150% total return. They're that far discounting interest rates. Which is why they're a % of my portfolio. If enough new prefs are issued, it's possible returns won't be as high, but they'll be more stable. Although, if 5-10 year bond interest rates go negative, CPD will fall more. Such is investing!


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## mordko (Jan 23, 2016)

Benjamin Graham described Preferred shares very well years ago. Essentially he did not recommend investing in prefs unless they were heavily discounted. Now could be one of those times.


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## tojo (Apr 20, 2009)

mordko said:


> Benjamin Graham described Preferred shares very well years ago. Essentially he did not recommend investing in prefs unless they were heavily discounted. Now could be one of those times.


I agree, there have been three periods that have been very profitable: End of 2008/early 2009, around Dec. 2013 and now (late 2015 to present). Prefs should never be bought at par. Once they get to around 23-25$, I sell....


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## Chris L (Nov 16, 2011)

james4beach said:


> What's not to like is that you're getting a worse total return than the TSX index.
> 
> to the end of March, average annual returns from iShares (_these total returns include dividends_)
> 
> ...


But the yield is stable and that's what I bought it for?

Year 2016: Up 7% so far + 5% yield = 12% (so far, with plenty more upswing potential)

Maybe I'm missing something? Value looks good to me.


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## AltaRed (Jun 8, 2009)

Quoted yield (in percentage terms) is pretty stable, but that is because stock price has gone down along with absolute yield. In other words, a fixed reset issued at 5.25% but with a formula of 180+GoC5 for reset would have reset this past month (at the 5 year mark) at about 180+70 = 2.5%. That is less than half the yield of the original issue. Correspondingly, that particular issue would now be trading in the $12 range rather than its par of $25.

What created havoc in the "fxed reset" pref market the last 2 years in particular was the unexpected drop in GoC5 bond yields, when the expectation was that yields would go up. Investors bought fixed resets making the assumption that at dividend yield reset date, the yield would increase as a result of increasing GoC5 yields (fixed resets are typically set at X+GoC5 for a yield formula.

Is it going to turn around? Most certainly because it is a matter of time for GoC5 bond yields to get out of the gutter at 0.7% and move up to a more normalized 2-3%. As well, the new prefs are now being issued with a floor yield in order to get investors to buy them. As more of these new prefs, and the reset of the old prefs at higher yields in the future, CPD and ZPR performance will be significant.

Prefs are not for everyone and for personal friends and family that ask me for financial guidance, I rarely mention prefs as a component of a portfolio. I have about 10% exposure in my portfolio to the pref market (resets + perpetuals) and I have suffered along the way the past 2-3 yrs. But I will obvioiusly stay the course since my premise for investing at the time was based on a GoC5 of circa 1.5%. That will return and anything above that will be gravy.

Added: I think now is an excellent time to purchase either CPD or ZPR. This is the 2008 equivalent of the common equity market for prefs.


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## mordko (Jan 23, 2016)

Yes, same here. I purchased in November 2015, have about 7 percent exposure to prefs. Between HPR and ZPR, currently nursing about 6 percent loss.


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## tojo (Apr 20, 2009)

AltaRed said:


> Is it going to turn around? Most certainly because it is a matter of time for GoC5 bond yields to get out of the gutter at 0.7% and move up to a more normalized 2-3%. As well, the new prefs are now being issued with a floor yield in order to get investors to buy them. As more of these new prefs, and the reset of the old prefs at higher yields in the future, CPD and ZPR performance will be significant.


A move up to a more normalized 2-3% GoC5 will certainly bring many of these beaten down prefs to par or near par. Depending on ones comfort level, investing in specific issues (EMA / TRP / PWF etc), particularly with the low reset spreads that now trade around $10-$12 will be very profitable should economic conditions even hint at a return to normal rates and narrowing credit spreads. Similar strategy I used in 2009 for floating rate preferreds (BAM.PR.K) buying at $7-8 / share and watching them go up 2.5X. One must do some homework, otherwise CPD / ZPR is the easier strategy.


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## james4beach (Nov 15, 2012)

Chris L said:


> But the yield is stable and that's what I bought it for?
> 
> Year 2016: Up 7% so far + 5% yield = 12% (so far, with plenty more upswing potential)
> 
> Maybe I'm missing something? Value looks good to me.


This goes back to my criticism of buying things for yield. You might _think_ you're just happy with yield, but you're not really. To prove this consider the following example: take $10,000 cash and put it in a savings account. Every year, remove $500 from it. You now have a stable 5% yield. In fact your yield will go up... it's 5% yield the first year, 5.2% yield next year, 5.6% yield next year!

The reason that's silly is that obviously, the capital is declining so you're not coming out ahead on a net total return basis.

That's why you shouldn't buy CPD (or anything) just for yield. Total return is what matters.


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## AltaRed (Jun 8, 2009)

The underlying prefs in CPD pay dividends and it is those dividends (less MER) that gets passed through to the investor. There is no intentional depletion of capital. If there is any ROC or re-invested distributions above and beyond that is a factor resulting from changes in constitents required to conform to the index on an ongoing basis.

The dividend stream (actual $$) is going to vary each year depending on which prefs reset to lower yield and/or are replaced by the new fixed reset prefs with a floor on yield. Distributions (actual $$) have in fact been declining in recent times due to lower yields from resets that have been resetting in the past few years.

But I do agree that dividend yield (percentage) is a bad metric and j4b's interest example is one way to articulate it. A different (simple) example is as follows: On Apr 1, 2015 fund X has a market price of $100 and has a dividend of $5. Yield is thus 5%. Spin forward one year to Apr 1, 2016. Market price has fallen to $80 and dividend is now $4.50. Yield now is 5.625% but.......but.... dividend $$ has actually declined.

I have not done the calculations to check the real CPD numbers on Dec 31, 2015 and Mar 31, 2016, but I am guessing underlying distribution $$ within the ETF is continuing to decline ever so slightly and the current monthly distribution will drop a bit shortly. It will eventually turn around though sometime when the new prefs with floor rates more than offset contined lower yields from the older resetting prefs. The monthly distribution is also masked by ROC tha may be in play. It will none the less be intersting to re-visit these numbers in a year's time.


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## james4beach (Nov 15, 2012)

I didn't mean that preferreds deplete capital, not at all. I was trying to illustrate the fallacy of choosing an investment based on yield while ignoring total return... anyway I'm in agreement with you.


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## Chris L (Nov 16, 2011)

james4beach said:


> That's why you shouldn't buy CPD (or anything) just for yield. Total return is what matters.


Agreed. I also believe that there is a big potential for capital appreciation as well.


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## bmoney (Jun 22, 2013)

Double digit gains since March, congrats to all the longs.


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