Preferred shares continue to grow in popularity among tax-savvy investors attracted to their unique blend of the security of equity and reliability of a bond.
Although preferred shares carry no voting rights, they still count as an ownership interest and this provides a surprising number of advantages.
How are preferred shares more secure and reliable?
Compared to common shares, preferred shares are generally more secure and reliable. Dividends for preferred shares must be paid out before those of common shares and those dividends are predetermined at issuance.
Investors also use preferred shares to diversify their portfolios for even greater security. Preferred shares tend to be more stable than common equities, while more volatile than fixed income securities. For this reason, adding preferred shares to a portfolio that also features equities and bonds offers significant diversification benefits.
What are the tax advantages of preferred shares?
One of the most popular benefits of a preferred share is that it pays dividends, which are not taxed as significantly as the interest income paid by bonds. In fact, invested correctly, the difference in after-tax yield can be significant.
What types of preferred shares are available?
There are four main types of preferred shares:
Retractable: These allow the shareholder to redeem the share at par value, which can be paid either by common shares or cash.
Perpetual: These have no maturity date and the shareholder often has no retraction rights, but the share pays a fixed dividend for as long as it remains outstanding.
Rate Reset: These pay a fixed dividend until a set reset date, at which time the shareholder can either choose a new dividend rate based on the economic conditions at the time, or opt for a floating rate preferred share.
Floating Rate: These pay a quarterly dividend at a rate that is based on, most often, the prime rate. Sometimes a minimum dividend is still established.
Where can I learn more about preferred shares?
Request your free copy of the CIBC Wood Gundy Investment Strategy Group’s Canadian Preferred Shares Report. This report covers the Canadian preferred shares market, potential investments and much more.
Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604 691-7207.