Preferred shares | Page 2 | Investing | Discussion forum

Bud said
how to profit from this information? prospectus too hard to understand enough to decide  

To the extent a NVCC compliant issue and a non-NVCC compliant issue have, today in the market, the same YTW, the non-NVCC compliant issue technically has more value, if for no other reason than it MIGHT have to be recalled someday at par (with a corresponding huge capital gain). All one can do is to do the YTW calculations and see whether random chance is worth the effort. Probably not and the short answer is: I don't really care.

Bud said
These bank and other split preferreds like XTD.PR.A seem to be the solution for the reset predicament. They are redeemable?

Any examples of minimum rate resets which have a floor  

A couple general comments:
- (1) Redeemable does not equal the issuer's obligation to redeem; you can sell them at any time for the prevailing market price on the secondary market, in consideration of liquidity issues particularly with split corp preferred shares, but the issuer may redeem at their reset date or earlier (as described in the prospectus)
- (2) Retractable preferred shares, on the other hand, typically, mean that the issuer is mandated to recall the preferred shares at set dates and, also typically, at par value. Only two such retractable preferred shares in Canada exist: (i) Brookfield Investment Corporation and (ii) Canadian General Investments, Inc., a closed-end mutual fund corporation
- (3) Be very careful with split corp shares as often they use financial engineering and leverage. You are honestly better off just buying the prefs and common shares of TD directly (split 50/50), if that's what you're interested in.
- (4) For the "floor," you'll want to look for the word "minimum" in the title of the rate reset preferred share, but as always, double-check the specifics of the issue in the prospectus. Preferred share investing is time-consuming and somewhat painstakingly nit-picky. If you're retired with lots of time on your hands, then you certainly have the time for such research.

Cheers,
Doug

Bud said

Time consuming opaque yes

Can you expand on engineering leverage as it relates to
XTD.PR.A for example, how could it blow up? It seems to be performing. Is only risk if Td cut its common dividend?  

It's complicated. I haven't researched it specifically. You might search "Market Call Tonight" and "Market Call" episodes on BNN Bloomberg where analysts have discussed split corp shares.

This Reddit thread does a reasonably good job of explaining the potential pitfalls.

While there's little to no risk of TD cutting its common share dividend, and, in turn, its preferred share dividends are safe because of their position in the capital share structural hierarchy, TD Split Corp. is not an issuance of TD Bank. Even if it were an issuer-sponsored closed-end fund, that doesn't matter. The dividend payments of TD Split Corp. do not equal the dividend payments of TD Bank. They are based on a combination of the dividends on the TD common and preferred shares and the price performance of the TD and common and preferred shares. If TD's shares are always in an upward trajectory, it's likely no problem. However, if TD's shares are trading downward, and the dividend payments more than the current dividend payments of the underlying TD common and preferred shares, TD Split Corp will have to (a) borrow money or (b) issue more shares, which devalue the net asset value of your asset, in order to make their dividend payments. There's also the ongoing management expenses, too, for operating TD Split Corp that affect TD Split Corp's overall cash flows.

In short, if you don't understand it, avoid it. That's why I said if you're attracted to the idea, you could buy half TD commons and half TD preferreds. Or, you could just buy TD commons.

Cheers,
Doug

Full and Fair Disclosure: I own ~250 common shares in TD Bank.

savemoresaveoften said
In layman's term, what TD split can "afford" to pay out is the sum of TD common share dividend + pref share dividend that TD split physically hold. On top they can generate some extra income such as writing calls and puts etc. No magic to it.

My beef against these type of product is the runner / company has to get PAID doing it, so all things being equal, you always get less than if you can replicate their "strategy" easily.

Just like Doug says, invest your money 50/50 in the common and pref shares, rather than invest in that product. This way guarantee you have the dividend tax credit advantage too (Not sure how the TD split works when it comes to the tax credit implication)  

Concur with all of that and, though they do use option writing strategies to generate the extra income, that in and of itself isn't necessarily problematic. It has more to do with the fact that they've essentially hamstrung themselves in paying a consistent dividend (at least on the prefs) whilst not necessarily having the income to support it. Factoring all of that in, plus the MER of the fund, you're almost certainly worse off than other strategies.

If yield is something you seek, you can look into BMO's covered call ETF strategies. There's a management fee for those, of course, but since the dividend isn't guaranteed (you will earn more when the market is more volatile and less when the market is not volatile), there isn't the sort of leverage involved.

Still, don't put everything into a BMO covered call ETF to generate the 4-7% yield as you will still see some capital price declines on the value of your ETF holding; it generally speaking, though, should decline less than the underlying stocks would on their own. Personally, I would probably be comfortable with 5-10% of that ETF in my portfolio, but YMMV. (First time using that acronym now!)

Cheers,
Doug

any preferred without min floor got clobbered as rates tanked (most resets at 5y GOC + x spread). Those that has minimum floor rate will trade close to $25 or premium as rates drop. The premium is also capped as the call risk at $25. Also as stock market tanked, the common share yield becomes more attractive relative to these pref, another reason why they wont fly off the shelf.
They are good div stocks in a low rate environment.