Canadian Preferreds Investing Guide for Beginners

Canadian preferreds are a type of fixed-income investment that offers a unique combination of regular income and relatively low risk.

They are issued by companies or governments to raise capital for specific purposes, such as refinancing debt or funding new projects.

Canadian preferreds typically offer a higher yield than bonds, making them an attractive option for investors seeking regular income.

Preferreds often have a higher credit rating than bonds, reducing the risk of default and making them a more stable investment choice.

Investors can choose from a variety of preferreds, including floating-rate and fixed-rate issues, to suit their individual investment goals and risk tolerance.

Canadian preferreds are a type of investment that offers a unique combination of income and capital preservation.

Preferred shares are a type of equity that gives investors a higher claim on assets and income than common shares. They typically have a fixed dividend rate and are often considered a lower-risk investment.

Preferred shares are often confused with common shares, but they have some key differences. Canadian preferreds are a popular investment option for entrepreneurs and individuals looking to build wealth.

Preferred shares are a type of preferred stock that offers a higher claim on assets and income than common shares. They are often used by companies to raise capital and provide a regular income stream to investors.

Some of the key characteristics of Canadian preferreds include:

You can purchase preferred shares in Canada directly from most major brokers, including discount brokerages like TD Bank's Canada Webbroker.

Preferred shares are shares that pay a steady stream of quarterly dividends, making them a good option for investors seeking a higher post-tax yield compared to fixed income securities.

The most attractive feature of preferred shares is the higher post-tax yield, which is currently favourable for corporate and individual investors.

A TD Bank Canadian preferred share, for example, currently yields 5.3%, making it an attractive option for investors seeking a fixed income return.

If you're purchasing a solid blue-chip preferred share from a reputable issuer, there's likely no need to worry about asset claims in the event of a bankruptcy.

If you're looking to invest in Canadian preferreds, consider your overall portfolio and keep it under 10-15% of your total investments. This is a good rule of thumb to follow, as preferreds shouldn't dominate your portfolio.

To get started, you can choose from three types of Canadian preferred shares: fixed resets, perpetual, and floaters. Fixed resets pay a fixed dividend for 5 years and are reset based on interest rates, while perpetuals pay a fixed dividend in perpetuity and can be called at any time.

For a steady stream of income, consider buying a perpetual preferred share at a price below $25. This way, you can hold the share forever and clip your dividend coupons, ignoring daily fluctuations in the share price.

If you're new to investing in preferred shares, consider an ETF like the BMO S&P/TSX Laddered Preferred Share ETF (TSE:ZPR) or CPD. This can provide a more diversified portfolio and reduce risk.

In terms of yield, it's essential to consider the yield-to-call and yield-to-worst. These calculations will give you a better idea of the overall yield you'll receive over time, taking into account call options and potential capital gains or losses.

To calculate the yield-to-call, you can use an Excel spreadsheet or a Google Docs version, such as the one available on PrefBlog. This will help you evaluate the yield-to-call for each call date and price, giving you a better understanding of the investment.

Here are some key characteristics of each type of preferred share:

Remember, the share price can fluctuate, but the dividend remains constant. If you plan to hold the share indefinitely, you can ignore the daily fluctuations and focus on the dividend payments.

In a Canadian portfolio, it's common to hold a mix of government and corporate bonds within a tax-sheltered account.

The income from these bonds will be taxed at an individual's marginal tax rate for ordinary income if earned in a taxable account.

Some individuals don't have enough room in their registered accounts for their fixed-income allocation and must choose between paying full marginal rates on bond income or purchasing preferred shares.

Preferred shares pay tax at lower marginal rates due to dividend tax credits.

A tax calculator can be used to estimate effective marginal tax rates for different types of income.

For example, an Ontario resident paying taxes at the maximum rates in 2009 would pay a marginal tax rate of 23.06% on dividend income and 46.41% on ordinary income.

A BC resident earning $40,000 per year in 2009 would benefit from a negative marginal tax rate on dividends of 10.53% and would pay a marginal 22.7% rate on ordinary income.

This means that a preferred share paying annual dividends of 6% would be equivalent to the Ontario and BC examples receiving bond income, respectively, at rates of 8.61% and 8.58% on an after-tax basis.

Dividend tax credits are non-refundable, so to take full advantage of them, an individual must be liable for sufficient federal and provincial taxes.

The dividend tax credit may result in higher marginal tax rates through claw-backs for individuals who receive government benefits, such as Old Age Security and Guaranteed Income Supplement.

Index funds and ETFs are popular investment options for Canadian preferred shareholders. The iShares S&P/TSX Canadian Preferred Share Index Fund is one such example, tracking the S&P/TSX Preferred Share Index.

This fund, formerly known as the Claymore S&P/TSX CDN Preferred Share ETF, was renamed on March 28, 2012. It's traded on the Toronto Stock Exchange (TSX: CPD) and has a management fee of 0.45%.

The fund's structure and fees make it an attractive option for those looking to invest in Canadian preferred shares.

A share index is a statistical measure that tracks the performance of a particular group of shares. The S&P/TSX Preferred Share Index is designed to track the performance of the Canadian preferred stock market.

Some share indices are designed to track a specific type of share, like preferred shares. The S&P/TSX Preferred Share Index is a great example of this, focusing solely on preferred stocks.

The BMO S&P/TSX Laddered Preferred Share Index ETF is designed to replicate the performance of the S&P/TSX Preferred Share Laddered Index, net of expenses.

This ETF invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.

It trades on the Toronto Stock Exchange (TSX: ZPR), making it easily accessible to investors.

The quoted Maximum Annual Management Fee for this ETF is 0.450%.

By tracking the S&P/TSX Preferred Share Laddered Index, the BMO S&P/TSX Laddered Preferred Share Index ETF provides a convenient way to invest in a diversified portfolio of preferred shares.

This ETF is a great option for those looking to add a laddered preferred share investment to their portfolio, with the added benefit of being an index fund, which can help reduce costs and increase efficiency.

Canadian preferreds can be a complex investment option, but let's break it down for you. The iShares S&P/TSX Canadian Preferred Share Index Fund has a MER of 0.45% and distributes monthly, with assets under management of $1.339 billion.

If you're considering investing in Canadian preferreds, you should be aware that the 2023 federal budget proposed to tax financial institutions on dividends received from Canadian preferred shares, which could impact the market. This change may lead to the institutionalization of the Canadian preferred market, as banks and other financial institutions issue new limited recourse capital notes (LRCN).

The table below compares two popular Canadian preferred ETFs:

It's essential to note that individual preferreds can be thinly traded, and investors may want to use limit orders to avoid untoward pricing.

Preferred shares can vary in price inversely with interest rates, meaning their price tends to go down as interest rates go up.

This general trend may have many exceptions, depending on the characteristics of the particular preferred, such as floating rate preferreds which have a variable yield and are less sensitive to interest rate changes.

Untoward events affecting the issuer can also impact preferred shares, like a rating downgrade or the halting of the common share dividend.

A detailed analysis of the prospectus is necessary to determine the differing risks associated with otherwise similar issues, due to variations in seniority and common-stock conversion rights.

Individual preferreds are often thinly traded, making it a good idea for buyers or sellers to use limit orders to avoid untoward pricing.

When comparing exchange traded funds, it's essential to consider their MER (management expense ratio), distribution frequency, and assets under management.

The iShares S&P/TSX Canadian Preferred Share Index Fund has a MER of 0.45% and distributes its income monthly. Its assets under management have grown to $1,339 million.

The BMO S&P/TSX Laddered Preferred Share Index ETF also has a MER of 0.45% and distributes its income monthly. Its assets under management are significantly higher at $1,979 million.

Here's a comparison of the two funds:

The 2023 federal budget proposed a significant change to the tax laws surrounding financial institutions and Canadian preferred shares.

The proposed tax on dividends received from Canadian preferred shares could potentially eliminate a significant after-tax benefit for some corporate owners.

This change has already led to a shift in the market, with banks and other financial institutions issuing new limited recourse capital notes (LRCN) to meet their funding needs.

As a result, the preferred share market is shrinking, and liquidity for the remaining outstanding preferred shares has deteriorated.

Preferred share valuations have declined as markets search for alternative buyers under sustained selling pressure.

The institutionalization of the Canadian preferred market is likely to continue, driven by the need for financial institutions to find alternative funding sources.

Fixed Reset Preferred Shares have a fixed dividend until the reset date, which is also the issuer's call date. This date is typically 5 years from the issuance of the share.

The issuer has the option to call the preferred share at the 5-year mark, generally at the $25 issuance price. If the issuer calls the shares, you can make a profit if your share is trading at a lower price. For example, if your share is trading at $22 and the issuer calls the shares at $25, you make a profit of $3 per share.

At the reset date, holders have two options: locking in a fixed dividend until the next reset date, or converting to a floating rate preferred share.

Here's a summary of the options available at the reset date:

There are several types of resets, each with its own purpose and benefits.

A power cycle reset is a simple and effective way to restart a device, similar to restarting a computer.

This type of reset is also known as a reboot.

A factory reset, on the other hand, returns a device to its original settings, erasing all personalized data.

This type of reset is often used when selling or disposing of a device.

A hard reset is a more extreme measure, similar to a factory reset, but it also clears the device's memory.

This type of reset can be useful when troubleshooting a device that's not functioning properly.

A soft reset, by contrast, only restarts the device without erasing any data.

This type of reset is often used when a device is frozen or unresponsive.

Fixed reset preferred shares are a type of preferred share that pays a fixed dividend for a set period of time, typically 5 years, before being reset based on current interest rates.

The reset date is also the issuer's call date, giving them the option to call the preferred share at a predetermined price, usually $25.

If the issue is not called, holders have two options: locking in a fixed dividend until the next reset date, or converting to a floating rate preferred share.

This flexibility allows investors to adapt to changing market conditions and potentially benefit from rising interest rates.

Here's a breakdown of the types of fixed reset preferred shares:

Fixed reset preferred shares perform better in a rising rate environment, making them a good option for investors looking to capitalize on increasing interest rates.

Retractable shares are a type of investment that gives the holder some control over their investment.

There are two types of retractable preferred shares: hard retractable and soft retractable. Hard retractable preferred shares force the issuer to redeem the shares for cash.

Soft retractable preferred shares, on the other hand, give the issuer the option of repaying the par value in cash or in common shares.

Retractable shares typically pay a fixed dividend, which means the investor can expect a steady return on their investment.

This can be a good option for investors who want a predictable income stream and some control over their investment.

Canadian preferreds offer a unique investment opportunity, with a fixed rate of return that can provide a predictable income stream. They are often issued by banks and other financial institutions.

Before investing in Canadian preferreds, it's essential to research the issuer and the specific security. This can help you understand the company's creditworthiness and the likelihood of default.

A good starting point is to examine the credit rating of the issuer, which can be found in the article section on "Credit Ratings". A higher credit rating generally indicates a lower risk of default.

If you're looking to buy preferred shares in Canada, you can purchase them directly from most major brokers.

TD Bank Canada Webbroker is one option to consider.

Laddered preferred shares are essentially a basket of Canadian preferred stocks. They can be found under various names, such as ZPD.

Research shows that CIBC Preferred Shares Report refers to laddered preferred shares. This type of investment is often misunderstood by its name.

In the case of CIBC Preferred Shares Report, it's not about following a specific investment strategy called laddered, but rather about holding a basket of Canadian preferred stocks.