The ins and outs of…preferred shares

Article Excerpt

Preferred shares offer similar security to bonds, but can also provide investors with a better after-tax yield. In addition, they rank ahead of common shares in the payment of dividends and in claims on the company’s assets. Preferreds, however, are a fixed-return investment, so in general, they drop in value when interest rates go up (as they are likely to do over the next few years); they rise in value when interest rates go down. As well, the underlying credit quality of the company issuing the preferred shares can be a negative factor; for example, when its share price falls, the value of its preferred shares typically fall, too. However, if you want to own preferred shares as part of the fixed-income segment of your portfolio, and you can accept some risk, then preferreds are okay to hold. That’s especially true of preferreds from high-quality issuers, including the Big Five banks, many Canadian utility companies and other major issuers. Still, we haven’t found…

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