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Preferred shares
August 14, 2020
5:03 am
Bill
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Preferred share yields are higher than gics due to the risk to your capital.

For those who don't want to do research does anyone have any experience or advice re. preferred share etfs or mutual funds?

September 3, 2020
11:41 am
Bud
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my guess all the Pfds back to par will be redeemed for lower rate stuff right?. whats left..

September 3, 2020
12:59 pm
canadian.100
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Bud said
my guess all the Pfds back to par will be redeemed for lower rate stuff right?. whats left..  

Bud - when the Pfds are redeemed, the issuer gives you cash. You can do what you want with the cash.

September 3, 2020
2:28 pm
asiamalekas
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Hi Bud,

Here is a list of all canadian preferred shares

https://canadianpreferredshares.ca/list-of-canadian-preferred-stocks/

There are about 400 preferred issues left. EFN.PR.G CA2861817898 just got redeemed for $25. It was trading above 25.

September 4, 2020
3:17 pm
Jon
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Pref have its risk. As I mention before, when the economy is booming, it track the performance of long term bond and its price will decrease as the yield increase. When the economy is in crisis, it will track the performance of common stocks as people worry about the viability of the issuer.

Junk bond (below BBB, or BBB itself in some situation, as grade inflation is also a thing with credit rating agency) also have the same property. Which make me hesitant to invest in both of them.

Won't it just be better to diversify only with a mix of investment grade bond, common stock, and precious metal ? The extremely low yield really is pushing people to some dangerous investment in order to seek yield, such as purchasing perpetual bond issue by BP (British Petroleum), when the world is on the cusp of moving away from gasoline and diesel car.sf-surprised

September 4, 2020
5:29 pm
AltaRed
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Perpetuals trade like long bonds. 5 year fixed resets do not. Then there are the floating resets as well. All respond differently to economic crises and interest rates.

September 4, 2020
7:41 pm
asiamalekas
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Jon said
Pref have its risk. As I mention before, when the economy is booming, it track the performance of long term bond and its price will decrease as the yield increase. When the economy is in crisis, it will track the performance of common stocks as people worry about the viability of the issuer.

Junk bond (below BBB, or BBB itself in some situation, as grade inflation is also a thing with credit rating agency) also have the same property. Which make me hesitant to invest in both of them.

Won't it just be better to diversify only with a mix of investment grade bond, common stock, and precious metal ? The extremely low yield really is pushing people to some dangerous investment in order to seek yield, such as purchasing perpetual bond issue by BP (British Petroleum), when the world is on the cusp of moving away from gasoline and diesel car.sf-surprised  

You can get preferreds from high quality companies. The average yield for a Pfd-2h (credit rating) preferred as of today's closing is 4.93%. On top of that you can add the dividend tax credit. I think preferreds are not well understood by investors so they end up being very cheap while at the same time offering great yields.

https://canadianpreferredshares.ca/preferred-shares-market-review/ you can see the average market yield of the preferreds by Credit-Rating and Sector.

September 4, 2020
10:16 pm
Norman1
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asiamalekas said

You can get preferreds from high quality companies. The average yield for a Pfd-2h (credit rating) preferred as of today's closing is 4.93%. On top of that you can add the dividend tax credit. I think preferreds are not well understood by investors so they end up being very cheap while at the same time offering great yields.

The mispricing of preferred shares is not as much as one thinks. Very few of the preferred shares are retractable. Consequently, one cannot force the company to buy them back or redeem them. The company won't redeem them if the terms of the shares are favourable to them.

I remember reading about some BC Tel preferred shares that paid something like 3% per annum. When interest rates on 5-year GIC's were over 10% in the 1980's, those shares traded nowhere around their par value. Those who had bought the shares were stuck as BC Tel was in no hurry to redeem shares they paid 3% on when they would have to pay 10%+ on their bonds.

The pricing and yield of preferred shares reflects a significant risk one could be stuck with the preferred shares for the next 100+ years! No-one is willing to lock in for the next 100 years for just 2% per annum.

September 5, 2020
5:44 am
canadian.100
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Norman1 said

asiamalekas said

You can get preferreds from high quality companies. The average yield for a Pfd-2h (credit rating) preferred as of today's closing is 4.93%. On top of that you can add the dividend tax credit. I think preferreds are not well understood by investors so they end up being very cheap while at the same time offering great yields.

The mispricing of preferred shares is not as much as one thinks. Very few of the preferred shares are retractable. Consequently, one cannot force the company to buy them back or redeem them. The company won't redeem them if the terms of the shares are favourable to them.

I remember reading about some BC Tel preferred shares that paid something like 3% per annum. When interest rates on 5-year GIC's were over 10% in the 1980's, those shares traded nowhere around their par value. Those who had bought the shares were stuck as BC Tel was in no hurry to redeem shares they paid 3% on when they would have to pay 10%+ on their bonds.

The pricing and yield of preferred shares reflects a significant risk one could be stuck with the preferred shares for the next 100+ years! No-one is willing to lock in for the next 100 years for just 2% per annum.  

This points out the reasons to have a diversified portfolio. It is the bottom result of the whole portfolio that counts - there will be winners and losers in the portfolio.

By the way, one is not "stuck" with preferred shares - they are saleable (if you really want to sell) on the market so you are not "locking in for the next 100 years" as you say. Just because they are not retractable or redeemable by the issuer, does not mean one is "stuck" with them. In your example for the BC Tel Shares - if one held these shares for the longer term, the market value came back when interest rates dropped. Those 10% rates on GICs or bonds your mentioned did NOT last "100 years". Here we are in a period when GIC rates are likely approaching 1% (or less) and highly unlikely to increase for quite some time. So a very different situation than your example of 10% GICs/bonds. Bottom line: diversity your portfolio. Those with 100% of their investments/savings in HISA or GICs right now understand that not diversifying has its downside too. I can't see why anyone would buy and lock-in to 5 year GICs at today's rates which yield between under 1% to approx 2% depending on FI. I realize that some people here are locking in because they feel GIC rates could drop to 0.5% or lower in 2021 so they think buying a 1% GIC now will look great in 2021.

September 5, 2020
5:52 am
asiamalekas
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Norman1 said

The mispricing of preferred shares is not as much as one thinks. Very few of the preferred shares are retractable. Consequently, one cannot force the company to buy them back or redeem them. The company won't redeem them if the terms of the shares are favourable to them.

I remember reading about some BC Tel preferred shares that paid something like 3% per annum. When interest rates on 5-year GIC's were over 10% in the 1980's, those shares traded nowhere around their par value. Those who had bought the shares were stuck as BC Tel was in no hurry to redeem shares they paid 3% on when they would have to pay 10%+ on their bonds.

The pricing and yield of preferred shares reflects a significant risk one could be stuck with the preferred shares for the next 100+ years! No-one is willing to lock in for the next 100 years for just 2% per annum.  

You can buy and sell preferreds at the market value any time. Expecting the issuer to redeem the preferred is the wrong reason to invest in preferreds. Redemption should be considered as a bonus.

On your example with BC Tel. I don't know anything about but I am sure the market would have brought the price of the preferred to a level where the yield was at least 15% (1.5 times what the bonds paid). To me it sound like it was a great time to buy. I assume it was issued at $25 and trading at $4-$5 with a current yield of 15%.

The average yield of the Canadian preferred shares market today is 5.7907%. You can multiply that by 1.3 (to include the dividend tax credit). You can double your money in about 13 years.

The 5 year GOC is 0.25% and after taxes are taking into account is closer to 0.15%. You can double your money in a few centuries.

For me the the risk/reward is clear when looking at the two asset classes.

September 5, 2020
6:55 am
canadian.100
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asiamalekas said

The 5 year GOC is 0.25% and after taxes are taking into account is closer to 0.15%. You can double your money in a few centuries.

You are hilarious when you say "you can double your money in a few centuries" with interest bearing (GICs or HISAs). I do agree with you the risk/reward is clear in this day and age between the 2 asset classes. I do believe that the next 2 or 3 years will be terrible for interest bearing investments/savings, while it will be great for those buying homes at very low mortgage rates and that is already happening as the housing market is on fire.

September 5, 2020
7:57 am
AltaRed
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I have a GIC maturing this weekend in my RRSP in my brokerage account. I will roll over to a new 5 year GIC on Tuesday at most likely 1.6%. 1.6% may be at least as good as average rates over the next 5 years.

I do not second guess rates. I follow my IPS (Investment Policy Statement).

September 5, 2020
8:47 am
canadian.100
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AltaRed said
I have a GIC maturing this weekend in my RRSP in my brokerage account. I will roll over to a new 5 year GIC on Tuesday at most likely 1.6%. 1.6% may be at least as good as average rates over the next 5 years.

I do not second guess rates. I follow my IPS (Investment Policy Statement).  

1.6% for a 5 year GIC is a spectacular rate from a brokerage acct. I just checked iTrade GIC rates. The 5 YEAR GIC rates iTrade offers are:
HSBC 0.8%
BNS 0.9%
CWB 1.1%
Versa 1.36%
B2B 1.14%
BMO 0.9%
Manulife 1.0%
Home Eq 1.6% the highest rate iTrade offers.
etc.
etc.
Obviously the Rating of the issuer will dictate the % rate of interest the FI must pay to attract funds. 0.09% for a 5 year Scotia GIC does not appeal to me in these unique times.

September 5, 2020
9:14 am
AltaRed
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Indeed, Scotia iTrade is where my RRSP is at. Both Home Trust and Home Equity @1.6% for now. Maybe different on Tuesday. Works for me.....

FWIW, my RRSP converts to RRIF this year, so I will remain in a 5 year GIC/bond/debenture ladder in that account (about 7% of my total investable assets).

September 5, 2020
9:24 am
Bill
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Preferreds are great as long as inflation, and therefore interest rates, are low, seems to be the bottom line to me. I've no idea why governments that print/borrow/etc unlimited ("whatever it takes", according to the new finance minister) amounts of money to keep the party going has not resulted in much higher inflation (how is money worth anything if you can just get/print more whenever you need?) but there you go, I'm no expert. Some on here have previously said these deficits and debt levels are no big deal, and that seems to be the general citizenry's stance too, so without the prospect of higher rates and inflation what's the risk to preferreds in general? I see the reward part, I don't see the risk part.

September 5, 2020
10:21 am
AltaRed
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Right now the global supply chain is keeping the cost of goods and services low. That will last as long as there are cheap sources to exploit. Increasing trade constraints would disrupt that to some degree and put pressure on inflation.

OECD printing presses are causing asset inflation such as stock markets and housing. Where it will all end, no one knows, but someday general CPI type inflation has to rear its head on some way.

It is really only true perpetuals that will be at risk someday but that someday could be many years away. In hindsight, I wish I had only owned perpetual prefs rather than any 5 year fixed resets.

September 5, 2020
11:27 am
canadian.100
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AltaRed said

It is really only true perpetuals that will be at risk someday but that someday could be many years away. In hindsight, I wish I had only owned perpetual prefs rather than any 5 year fixed resets.  

I agree with u re the Perpetual Prefs - it might be a few years before they are at risk - my plan is to sell them when the time looks right (not likely earlier than end of 2021 or in 2022) - and in the meantime enjoy the 5%-6% dividends and minor (unrealized) capital gains.
Are u ever right about the Rate Resets - wish I had never bought them 10 years ago - but they are paying steady tax advantaged dividends - while the principal value has decreased from my cost, the dividends collected over the 10 years have covered those (unrealized) losses. My plan is to hold the Resets and collect the dividends because when interest rates do start to increase (and I know that is not in the near term), the principal value (market value) will likely increase because of the reset clause. I feel we are in a very unique period due to the pandemic and the high spending of the Trudeau govt, which will definitely keep interest rates very low for as long as possible in order to keep the interest cost on the debt "low". Actually, even if an O'Toole govt is elected, they will also keep up the spending and maintain very low interest rates. Austerity is a "no go" to Canadians and I think O'Toole gets that.

September 5, 2020
1:45 pm
Righand
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I have done fairly well with the rate resets because I have only purchased the ones that are above p-3 rated and have a floor.
I also never buy them above par and if one is patient there are always times when they drift below par, of course if rates ever do skyrocket in a time of future inflation they will be called.

A few that I hold are CU.PR.I and EMA.PR.H and have confidence in, but of course do your own DD.

September 5, 2020
4:36 pm
Jon
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Bill, as I mention previously, we are facing two massive deflationary factors - aging population (less money chasing after same amount of goods) and technological improvement (same amount of money chasing after more goods). The money printing is one of the few things that keep us away from a deflation spiral, where people refuse to spend money as they believe they can purchase the same amount of goods for less in the future (which reduce the velocity of money changing hand - the ultimate determining factor of inflation).

However, going back to what AltaRed say, as the concept of free trade is under attack, we may actually see higher inflation in the future (the theory of competitive advantage by David Ricardo will answer this).

However, this is base on the fact that people still have trust on currency, otherwise, they will spend and invest the money ASAP and dramatically increase velocity of money, which led to hyperinflation.

Moving back to preferred share, I still see them as a bad investment because it carry most of the risk of common stock, but you only get a fix return instead of enjoying the success of a company.

September 5, 2020
5:35 pm
Jon
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However, pref do have a place when the market is humming along with no significant inflationary pressure.

Additionally, an economic crisis is also a good opportunity for purchasing pref.

Please write your comments in the forum.