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Preferred shares
September 11, 2020
7:41 am
canadian.100
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Norman1 said
Royal Trustco had suspended the dividends for some years on both on its preferred and common shares. They were investment grade. The company was so blue chip that it could issue non-cumulative preferred shares that don't have to make up skipped dividends.

Central Guaranty Trustco went bankrupt after CDIC took control of its Central Guaranty Trust subsidiary. Its preferred shares became worthless. I still have the nice looking share certificates as a reminder.

Twenty to thirty years is a long time. Lots can happen in that time.

One is not receiving 4% to 5% from preferred shares, while Government of Canada bonds are yielding under 1%, without taking on risk. That risk is that of being a shareholder. If one does not see that risk, then one is actually blind to the risk and has not found a "bargain" that no-one else realizes.  

Hopefully
1. you were well diversified in your investments so you did not lose too much in RT and GT losses.
2. you were able to write off your capital losses against some more recent capital gains. (RT and GT were many years ago so hope you have had some Cap Gains since then in other investments - whether shares, bonds, mutual funds etc.)

September 11, 2020
12:21 pm
savemoresaveoften
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For those that talk about annuities as an alternative, now is the worst time to buy annuity given how flat the yield curve is. Annuity pricing is a function of expected longevity and a PV discounting exercise, nothing much. With the entire yield curve so low and flat, the PV just make it a horrible purchase.

So an annuity is a hedge of your longevity and nothing else. Its as bad as a GIC "yield wise".

September 11, 2020
2:58 pm
asiamalekas
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Norman1 said
Royal Trustco had suspended the dividends for some years on both on its preferred and common shares. They were investment grade. The company was so blue chip that it could issue non-cumulative preferred shares that don't have to make up skipped dividends.

Central Guaranty Trustco went bankrupt after CDIC took control of its Central Guaranty Trust subsidiary. Its preferred shares became worthless. I still have the nice looking share certificates as a reminder.

Twenty to thirty years is a long time. Lots can happen in that time.

One is not receiving 4% to 5% from preferred shares, while Government of Canada bonds are yielding under 1%, without taking on risk. That risk is that of being a shareholder. If one does not see that risk, then one is actually blind to the risk and has not found a "bargain" that no-one else realizes.  

Good Info Thanks Norman1.

September 11, 2020
9:44 pm
Norman1
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There were also the preferred shares of Nortel Networks Limited. DBRS rated them Pfd-2 in May 2001 at the same time the long-term debt was rated A.

Company was also blue chip enough to issue non-cumulative preferred shares.

Dividends suspended in November 2008. In early 2009, the company filed for creditor protection.

September 11, 2020
10:06 pm
Norman1
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canadian.100 said

Hopefully
1. you were well diversified in your investments so you did not lose too much in RT and GT losses.
2. you were able to write off your capital losses against some more recent capital gains. (RT and GT were many years ago so hope you have had some Cap Gains since then in other investments - whether shares, bonds, mutual funds etc.)

Unfortunately, the Royal Trustco and Central Guaranty Trustco preferred shares took out 30%+ of the portfolio back then. There was some recovery from the Royal Trustco shares.

After selling Royal Trust and other desirable assets to Royal Bank, Royal Trustco was renamed Gentra. Gentra had all the bad real estate loans that Royal Bank didn't want to take. Gentra foreclosed and dealt with the real estate for years afterwards.

Eventually, Gentra became profitable. One day, it resumed paying dividends. That included the skipped dividends on their cumulative preferred shares. Those who had one of the series of non-cumulative preferred shares were out of luck as far as the skipped dividends.

Yes, I was eventually able to use up the resulting capital losses from the Central Guaranty Trustco preferred shares.

September 12, 2020
2:00 am
Loonie
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Yours is certainly a cautionary tale, Norman. Sorry for your losses, but we all benefit from your sad experience now.
You might have been better off with GICs at those trustcos. I think I had an RSP GIC at Central Guaranty but I went through my old RSP docs quickly and couldn't find it. I did find a slew of other trustcos that no longer exist. Sterling Trust, Victoria and Grey, Shoppers Trust, etc etc. Not sure what happened to them, but at one time I had (insured) GICs with all of them.
I think Vic and Grey went to Scotia eventually but not sure. I had my very first bank account with them, as a child - courtesy of grandma!

September 12, 2020
2:26 am
Loonie
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savemoresaveoften said
For those that talk about annuities as an alternative, now is the worst time to buy annuity given how flat the yield curve is. Annuity pricing is a function of expected longevity and a PV discounting exercise, nothing much. With the entire yield curve so low and flat, the PV just make it a horrible purchase.

So an annuity is a hedge of your longevity and nothing else. Its as bad as a GIC "yield wise".  

The best time to buy annuities is gradually, normally in your 70s, so that you spread out the average return and benefit from a better rate as you get a few years older and your life expectancy diminishes.

I've been watching the rates on annuities for a few years. The rates are lower than they were several years ago. Part of that is due to an adjustment the insurance industry made a couple of years ago due to increased life expectancies. Their rate calculations are based on long trajectories, so they aren't nearly as volatile as GIC rates. That is part of the point of them, to reduce income volatility.

It's by no means a "horrible" purchase for the person who needs to have a secure income. They know exactly what they will get for the rest of their lives, barring collapse of entire insurance industry. You can't get that from GICs unless you are sure you will die within the term of the GIC you hold.
But yes, it is an effective hedge against longevity. You can't outlive an annuity like you can the money you invested in GICs. With today's ultra-low rates and no end in sight, this ought to be a concern for increasing numbers of people.

People with a couple of million under their belts won't need them and can afford to be disparaging about them as investments, but most people are not in this category and will need to do something that ensures they have enough to live on for the rest of their lives without running out.

The insurance industry makes a lot of money out of these, and i wish there was a solution that was more advantageous to the pensioner, but for people whose pension income doesn't quite meet their living expenses and don't have a huge amount of money socked away, I don't know a better solution.

September 12, 2020
7:23 am
topgun
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Loonie said
Yours is certainly a cautionary tale, Norman. Sorry for your losses, but we all benefit from your sad experience now.
You might have been better off with GICs at those trustcos. I think I had an RSP GIC at Central Guaranty but I went through my old RSP docs quickly and couldn't find it. I did find a slew of other trustcos that no longer exist. Sterling Trust, Victoria and Grey, Shoppers Trust, etc etc. Not sure what happened to them, but at one time I had (insured) GICs with all of them.
I think Vic and Grey went to Scotia eventually but not sure. I had my very first bank account with them, as a child - courtesy of grandma!  

I purchased 17 1/2 and 18 1/2 year Ontario Hydro strip bonds called Cougars yielding 11.75% in early 1985 at Guaranty Trust. Not sure their name when I cashed the strip bonds in 1998.

I think you are correct about Victoria and Grey going to Scotiabank.

Many trust companies disappeared. Dominion Trust was bailed by CDIC. Interest stopped immediately on failure date. I received principle and interest to that time.

Cabot Trust failed. Assets transferred to Laurentian Bank.

Have a Great Day

September 12, 2020
11:44 am
topgun
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topgun said

I purchased 17 1/2 and 18 1/2 year Ontario Hydro strip bonds called Cougars yielding 11.75% in early 1985 at Guaranty Trust. Not sure their name when I cashed the strip bonds in 1998.

I think you are correct about Victoria and Grey going to Scotiabank.

Many trust companies disappeared. Dominion Trust was bailed by CDIC. Interest stopped immediately on failure date. I received principle and interest to that time.

Cabot Trust failed.
I found some information about Cabot Trust Company on the internet. It was merged into Manulife Bank January 1, 1993. Huronia Trust Company and Regional Trust Company were also involved in merger. This matches some of my own records. Some assets went to Manulife Bank. Some assets went to Laurentian Bank. I think it depended on when my 5 yr GIC's matured.

Have a Great Day

September 12, 2020
1:26 pm
canadian.100
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topgun said

topgun said

I purchased 17 1/2 and 18 1/2 year Ontario Hydro strip bonds called Cougars yielding 11.75% in early 1985 at Guaranty Trust. Not sure their name when I cashed the strip bonds in 1998.

  

Wow! Ontario bonds @11.75% in 1985. In 1985, GIC 5 year rate was 10.5%. In 1990 the rate was about the same. In 2000 the 5 year GIC rate was 5.3%. It was pretty much downward from there. Today the 5 year GIC rate is under 1% for 5 year GICs from the major banks and perhaps 1.5% to 2% max from the "B" category FIs. We have a very long way to get back to anything close to those earlier rates.

September 12, 2020
4:23 pm
topgun
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canadian.100 said

Wow! Ontario bonds @11.75% in 1985. In 1985, GIC 5 year rate was 10.5%. In 1990 the rate was about the same. In 2000 the 5 year GIC rate was 5.3%. It was pretty much downward from there. Today the 5 year GIC rate is under 1% for 5 year GICs from the major banks and perhaps 1.5% to 2% max from the "B" category FIs. We have a very long way to get back to anything close to those earlier rates.  

I borrowed the FULL amount to purchase strip bonds in 1985. Not sure what I paid on the loan. I have a long time friend that I see every 1-2 years. We discuss things that we never had time to discuss in school/working days. Sometime he told me he bought 5 yr GIC's. In the last couple years he told me in the high of 1981 you could buy 20 yr strip bonds yielding 24%. I did not ask him how much he purchased.

I know in September 1993 when I had a 5 yr GIC maturing I could get 6.75% for 5 yr GIC at a trust company. That is when I stopped buying GIC's. Maturing GIC's I put in the stock market. I thought you could make about 2% more annually.

Interest rates peaked Dec 1981. CSB's were paying 19%. One friend purchased $5,000, I assume cash. I have another friend that borrowed $15,000 @ 16% and purchased $15,000 CSB's. Neither person knew the other. Both amounts very large at the time. Personally I cashed RSP to pay some of my loans. Interest rates far to high to be paying interest.

Interest rates track inflation rates. In times like TODAY with low to zero inflation the best you can hope for is 2%.

1985 I bought a few RRSP GIC's.
1 yr 9.0%.
3 yr 10.25%
5 yr 11 1/8%
I did not know it at the time, it is called a ladder today.

It all worked out. We are retired.

Have a Great Day

September 12, 2020
6:55 pm
Bill
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If I was afraid of outliving my money I'd not like to give away my capital forever to buy an annuity at miniscule rates, probably rather buy one of the big bank Cdn dividend funds for regularly increasing income and likely even capital preservation/appreciation if things go as in the past. Some of these funds have done half-decently, historically, after fees. Of course there are downsides to this course of action too, but I'd prefer it to annuities these days. Maybe there are other ideas too, that's the one that first comes to mind.

Anyway, how much certainty/insurance/"guaranteed safety" do you need in Canada in your last few decades/years? I think an individual can get about $24k/yr just from max CPP, OAS & GIS, hardly any income tax to pay, so if you've got no debt and a spouse getting the same then you don't really need much more to survive on when you're old. And most people have some extra put aside, use it up. Plus I believe the-take-from-those-that-have-and-give-to-those-that-don't social sentiment is only growing so things will probably get even better in the future. Also can cash in your big city house and move to a smaller town with adequate medical care nearby, not as much around to spend your money on, Canada's got lots of nice spots.

September 12, 2020
9:11 pm
Loonie
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Bill said
If I was afraid of outliving my money I'd not like to give away my capital forever to buy an annuity at miniscule rates, probably rather buy one of the big bank Cdn dividend funds for regularly increasing income and likely even capital preservation/appreciation if things go as in the past. Some of these funds have done half-decently, historically, after fees. Of course there are downsides to this course of action too, but I'd prefer it to annuities these days. Maybe there are other ideas too, that's the one that first comes to mind.

Anyway, how much certainty/insurance/"guaranteed safety" do you need in Canada in your last few decades/years? I think an individual can get about $24k/yr just from max CPP, OAS & GIS, hardly any income tax to pay, so if you've got no debt and a spouse getting the same then you don't really need much more to survive on when you're old. And most people have some extra put aside, use it up. Plus I believe the-take-from-those-that-have-and-give-to-those-that-don't social sentiment is only growing so things will probably get even better in the future. Also can cash in your big city house and move to a smaller town with adequate medical care nearby, not as much around to spend your money on, Canada's got lots of nice spots.  

It's quite true that most people wouldn't "like" to let go of some capital in order to buy a lifetime guaranteed income. But we shouldn't discourage those for whom it might be the right solution.
I'm quite sure Bill is not one of those people.

Dividend-producing "blue chip" stocks will be fine for people whose basic necessities are covered and for some who are willing to take a bit of a risk of not having enough income.

There is no stock, blue chip or not, dividend or not, preferred or common, which guarantees a predictable income for life, and that is the issue here.

I remember reading, a few years ago, on the 'Investor relations" portion of one of the Big Bank websites about their history of dividends, beginning from when the bank was founded. It was impressive, but it was clear that dividends did not always go up; sometimes they went down.

To speak about an ideal situation where people get maximum CPP, are in a couple relationship, and so on is a distraction. It is well known that the vast majority don't get anywhere near maximum CPP.

I'm not suggesting annuities are a solution for everyone, but I do think they should be given fair consideration by those for whom it would be suitable and not dismissed out of hand.

September 12, 2020
10:19 pm
AltaRed
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Loonie said

It's quite true that most people wouldn't "like" to let go of some capital in order to buy a lifetime guaranteed income. But we shouldn't discourage those for whom it might be the right solution.
I'm quite sure Bill is not one of those people.

Dividend-producing "blue chip" stocks will be fine for people whose basic necessities are covered and for some who are willing to take a bit of a risk of not having enough income.

There is no stock, blue chip or not, dividend or not, preferred or common, which guarantees a predictable income for life, and that is the issue here.

I remember reading, a few years ago, on the 'Investor relations" portion of one of the Big Bank websites about their history of dividends, beginning from when the bank was founded. It was impressive, but it was clear that dividends did not always go up; sometimes they went down.

To speak about an ideal situation where people get maximum CPP, are in a couple relationship, and so on is a distraction. It is well known that the vast majority don't get anywhere near maximum CPP.

I'm not suggesting annuities are a solution for everyone, but I do think they should be given fair consideration by those for whom it would be suitable and not dismissed out of hand.  

+1 for a thoughtful and appropriate post.

September 13, 2020
6:12 am
canadian.100
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Loonie said
There is no stock, blue chip or not, dividend or not, preferred or common, which guarantees a predictable income for life, and that is the issue here.
 

I would also include GICs in your list above - investments which do not guarantee "a predictable income for life". For some retired friends of mine, their GICs are not turning out to provide a predictable income in retirement. I believe they bought mainly GICs for retirement income. They now hope Justin Trudeau will bail them out with his Guaranteed Income initiative expected to be announced in the upcoming throne speech.

September 13, 2020
6:56 am
savemoresaveoften
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Bill said
If I was afraid of outliving my money I'd not like to give away my capital forever to buy an annuity at miniscule rates, probably rather buy one of the big bank Cdn dividend funds for regularly increasing income and likely even capital preservation/appreciation if things go as in the past. Some of these funds have done half-decently, historically, after fees. Of course there are downsides to this course of action too, but I'd prefer it to annuities these days. Maybe there are other ideas too, that's the one that first comes to mind.

Anyway, how much certainty/insurance/"guaranteed safety" do you need in Canada in your last few decades/years? I think an individual can get about $24k/yr just from max CPP, OAS & GIS, hardly any income tax to pay, so if you've got no debt and a spouse getting the same then you don't really need much more to survive on when you're old. And most people have some extra put aside, use it up. Plus I believe the-take-from-those-that-have-and-give-to-those-that-don't social sentiment is only growing so things will probably get even better in the future. Also can cash in your big city house and move to a smaller town with adequate medical care nearby, not as much around to spend your money on, Canada's got lots of nice spots.  

Avg Canadians rec 60% of the max CPP...

September 13, 2020
9:34 am
Norman1
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Loonie said
Yours is certainly a cautionary tale, Norman. Sorry for your losses, but we all benefit from your sad experience now.
You might have been better off with GICs at those trustcos. …

Yes, I would have received my principal back with a Central Guaranty Trust GIC instead of 100% loss of my principal in their preferred shares.

I think people who buy lots of GIC's forget that a 4% to 5% per annum payout is good only if the original investment is returned. It is actually not good if something happens and the original investment is gone within ten or twenty years.

Preferred shares are shares and not a GIC or a bond. I think the correct way to frame the risk of using them to generate retirement income is to consider living off the common shares of the same issuers.

If one is comfortable with the idea of living off the common shares, then one has understood the risk involved. If one is not comfortable with that, then one has not really understood the risk and really should not be trying to live off the preferred shares.

Contrary to all the malarkey from the brokers, the risk of the preferred shares is not that much less than that of the common shares. When Nortel imploded, both common shareholders and preferred shareholders were wiped out.

September 13, 2020
9:44 am
AltaRed
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Norman1 said
Contrary to all the malarkey from the brokers, the risk of the preferred shares is not that much less than that of the common shares. When Nortel imploded, both common shareholders and preferred shareholders were wiped out.  

I agree. Most often bond holders have to take a major haircut with common equity shareholders wiped out. If bond holders take a haircut, that means pref shareholders are also wiped out with the common equity shareholders. "Preferred" is pretty much an oxymoron.

September 13, 2020
9:49 am
Bud
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Remind us again what are the preferreds with a "floor" why do they have a "floor" under them?

September 13, 2020
10:02 am
Jon
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Norman and AltaRed, this is exactly why I don't invest in pref. I could wait for the price to go back to par as I am young, but the biggest problem for pref is the return and risk are not proportionate. As I mention, pref have most of the risk of common stocks, but not the upside of common stocks.

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