# RBC First Pref Sh Series Az RY-PR-Z ?



## jargey3000 (Jan 25, 2011)

These caught my eye over on the "What are you Buying" thread. I'd like to know a little more about them.
What type of investor or situation or portfolio are they best-suited?
Which type acct. - reg or non-reg - do they work best with etc.?
Any comments appreciated.
(ps I may go "all-in" on these ...  )


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## Jimmy (May 19, 2017)

The dividends are taxed like common stock dividends so they work well in either taxable or reg accounts.

PS are still a little beaten down from 2015 when interest rates fell 1% but have risen .5% since recently ( the share price rises when interest rates rise due to the div rate being 'reset' ) . The dividends are now ~ 4.3% but w share appreciation they yield closer to 5% now. Could return 5-8% this year. The RBC are 'rate reset' too so if they hike interest rates .25 - .5% that just boosts the share price and yields similarly.

Actually have a calculator for PS. The div is 4.17% for RY.PR.Z. Price 23.9. Yield to call is ~ 5.2%.

I bought some HPR recently. Was up ~ 10% last year w the interest rate hikes. Better than any bonds now which are getting hurt w the rate hikes.


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## jargey3000 (Jan 25, 2011)

thanks jim.
sounds pretty good....sooooo, what's the 'downside' with 'em?..........


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## Jimmy (May 19, 2017)

They are not as safe as bonds in downturns but are still fairly uncorrelated to the S&P /TSX. They also can be hurt when interest rates fall but some now have 'floors'. Interest rates cuts are unlikely given they are at near historic lows. 

Big problem was in 2015. rates were 1.5% then Poloz cut rates to .5%. The yields are usually ~2% + the Can 5 yr bond yield. So the yield fell from 4% to ~ 3% or about 25%. The share price fell accordingly. But again rate cuts now very unlikely and teh cut was large and a much larger % change of the yield than normal. 

Soon w interest rates at 2-3%, 5 yr bond yileds at 4-5% they will yield 6-7%. A .25% interest rate drop then will only result in a ~ 4% share price drop but returns will stuill be +ve w the dividend yield.

They are a complement to bonds, maybe 30% of your FI at max. But not bad for a low risk equity asset.


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## Eder (Feb 16, 2011)

Heres a link to their prospectus

http://www.rbc.com/investorrelations/pdf/SeriesAZ.pdf

Remember you do need to be careful and ensure some kind of liquidity is available if you want to trade preferreds. I'm vacuuming up some in an attempt to derisk some of my investment portfolio as I may be away from internet for a number of months.


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## jargey3000 (Jan 25, 2011)

good info. folks....thanks. I might take a nibble...


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## jargey3000 (Jan 25, 2011)

I guess I'll get arguments for either....but I'll ask anyway...:
If one wanted to invest in pref shares...is it better to pick out one i.e. these RBC PS, or go with a PF ETF i.e HPR as mentioned above.... Comments?


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## like_to_retire (Oct 9, 2016)

jargey3000 said:


> I guess I'll get arguments for either....but I'll ask anyway...:
> If one wanted to invest in pref shares...is it better to pick out one i.e. these RBC PS, or go with a PF ETF i.e HPR as mentioned above.... Comments?


I suppose if you didn't want to learn too much about preferred shares you could buy an ETF. Even then, you'd be investing in something that is fairly complex and easy to lose money. I took a quick look at the Horizons Active Preferred Share ETF you mention, and I'm not too impressed with the prospectus where it points out its investment objectives as: _The investment objective of the Horizons Active Preferred Share ETF (the “ETF”) is to provide dividend income while preserving capital by investing primarily in preferred shares of Canadian companies. The ETF may also invest in preferred shares of companies located in the United States, fixed income securities of Canadian and U.S. issuers, including other income generating securities, as well as Canadian equity securities and exchange traded funds that issue index participation units. The ETF, to the best of its ability, seeks to hedge its non-Canadian dollar currency exposure to the Canadian dollar at all times._. 

Yeah, I would be concerned about the tax characteristics of this fund, given that they may also invest in U.S preferred shares, fixed income securities of Canadian and U.S. issuers, including other income generating securities, along with the cost of hedging. The tax advantage of the dividend tax credit could easily be watered down. 

One of the main reasons to invest in preferred shares instead of corporate bonds, even though they are subordinate to bonds in terms of claim or rights to their share of the assets of the company (bonds are senior to pref shares) is due to their tax advantage in a non-registered account. This means you would generally never buy preferred shares in a registered account. You would simply buy the corporate in the registered account.

Anyway, you could look at either iShares S&P/TSX Canadian Preferred Share Index ETF (CPD): Cap-weighted fund reflecting the broad market for Canadian preferreds. (MER: 0.51%) or BMO Laddered Preferred Share Index ETF (ZPR): Laddered fund of strictly rate-reset preferreds, 20% of which will reset their payout in any one year, which reduces the interest rate risk. (MER: 0.50%)

If you want to learn a little about preferred shares and the various type (and this is essential before you ever go near a preferred share) is to download The Preferred Share Guide from Scotia Capital that they issue each year. It's a good primer on preferred shares. It can help you in purchasing individual issues and understanding of how they react to interest rates, etc. 

ltr


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## InvestingForMe (Sep 6, 2012)

If you are searching for additional information on preferred shares, our Data Room gives investors free background info for over 200 individual shares currently trading in Canada.

Hope this is helpful


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## Jimmy (May 19, 2017)

like_to_retire said:


> I suppose if you didn't want to learn too much about preferred shares you could buy an ETF. Even then, you'd be investing in something that is fairly complex and easy to lose money. I took a quick look at the Horizons Active Preferred Share ETF you mention, and I'm not too impressed with the prospectus where it points out its investment objectives as: _The investment objective of the Horizons Active Preferred Share ETF (the “ETF”) is to provide dividend income while preserving capital by investing primarily in preferred shares of Canadian companies. The ETF may also invest in preferred shares of companies located in the United States, fixed income securities of Canadian and U.S. issuers, including other income generating securities, as well as Canadian equity securities and exchange traded funds that issue index participation units. The ETF, to the best of its ability, seeks to hedge its non-Canadian dollar currency exposure to the Canadian dollar at all times._.
> 
> Yeah, I would be concerned about the tax characteristics of this fund, given that they may also invest in U.S preferred shares, fixed income securities of Canadian and U.S. issuers, including other income generating securities, along with the cost of hedging. The tax advantage of the dividend tax credit could easily be watered down.
> 
> ...


HPR has only ~ < 2% in US preferred and other investments. It is also an actively manged fund. ZPR and CPD are just their indexes and are ok but HPR has superior returns to both over any period. This is one area where I think active management is an advantage. The individual stocks can be under/over valued so there is some value in stock picking. The other ETFs just buy the latest company issues.

http://stockcharts.com/freecharts/perf.php?zpr.to,hpr.to,cpd.to


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## like_to_retire (Oct 9, 2016)

Jimmy said:


> HPR has only ~ < 2% in US preferred and other investments. It is also an actively manged fund. ZPR and CPD are just their indexes and are ok but HPR has superior returns to both over any period. This is one area where I think active management is an advantage. The individual stocks can be under/over valued so there is some value in stock picking. The other ETFs just buy the latest company issues.


Hey Jimmy, yeah I've certainly heard all the arguments for actively managed preferred shares versus the indexes and they do ring true somewhat. The preferred share market is incredibly inefficient, mostly made up of retail investors who have no idea of the differences between fixed resets, perpetual straights, floaters, splits, retractables, etc. They see a current yield and buy it. That's the extent of their research. The spreads are sometimes jaw dropping and you can definitely make money if you know what to look for. Personally, I only invest in individual shares, and admit to making a fair number of incorrect calls on interest rates as they pertain to preferred shares. Even the best of active managers can fall victim. So yeah, the market is complicated and an ETF that is properly actively managed should be able to add value if they make the right predictions. I don't necessarily buy that they will be able to do it over long periods of time, and of course, active management cost money, nothing is free. That's the beauty of indexing I suppose. 

I only pointed out that I didn't like the fact that HPR has the right to invest in US preferreds and that doesn't sit well with me since you negate the tax advantage of preferreds when you do so (I mean, why the hell else would you invest in such complex nonsense if it wasn't for that?). Sure, they may not have a large US component today, but they have the right to do so. If the higher cost of active investment and the possibility of alternate investments sits well with purchasers of this fund, then great, as long as they're aware. Personally, I would recommend taking a position on the type of index you feel will do well in the two ETF's I suggested and let it ride as I don't know if HPR is such a slam dunk to outperform over the long term. Who knows?

ltr


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## jargey3000 (Jan 25, 2011)

....love CMF...


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## Jimmy (May 19, 2017)

I am still a novice w these PS but I have learned some of the broad strokes. I don't think you could go horribly wrong w some existing bank PS issues. They are investment grade credit. pf2. Reset at 5 yr govt bond + 2.21% so that is ~ 4.24% but you can buy existing issues at a discount now so the real yields are ~5%+.

It looks like there will be more rate hikes so as the reset div goes up, these should rise in value. Getting a 6% return for the level of risk seems pretty decent.

That issue RY.PR.Z was back in 2014 and they were pounded when Poloz cut rates. They are selling at a discount now at $24 so you have another 4% of capital gain before 2019 when they are reset. So yields are ~ 5% now + whatever rate hikes between now and 2019 will push the yield up even more as well.


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## Eder (Feb 16, 2011)

The only problem with most of these pf2 shares is liquidity...you can really move the dial with only a 2000 share order. Never market orders or sales...patience in & out (days).


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## fireseeker (Jul 24, 2017)

Jargey, suggest you invest some time reading here:
http://prefblog.com/


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## jargey3000 (Jan 25, 2011)

fireseeker said:


> Jargey, suggest you invest some time reading here:
> http://prefblog.com/


what's lacrosse got to do with this ??????
kidding! just kidding, fseeker....thanks


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