Preferred Shares – Is this the new replacement for fixed income?

Preferred Shares – Is this the new replacement for fixed income?

As readers of my blog you’re probably well aware that common stocks that pay dividends and low-cost, diversified Exchange Traded Funds (ETFs) – are the two primary building blocks of my investment portfolio.

But what about preferred shares?  Why not own them?  What are they in the first place?  Should you consider owning them in this rate environment?  If so why or why not?

I’ve been thinking about writing a comprehensive post about preferred shares for some time.  Thanks to a recent reader request here is it today.  First though, I want to introduce the reader himself who authored most of this post with me – Matthew Wilson.

Matthew Wilson is an entrepreneur, investor, and co-founder of Calgary Beer Week. Having started his first company at age 11, he now works as an advisor to start-ups and early stage organizations, helping to build their business model, sales, and marketing strategies. He currently writes at about personal finance, entrepreneurialism, and personal development.

(Editor’s note:  who doesn’t love craft beer?)

Matthew’s bio goes on to say he started his first company at age 11 and sold his last one at age 28.  Now in his mid-30s he continues to love all things money and wanted to write this post – a point counter-point article about preferred shares with yours truly.

Preferred Shares 101

Matthew, this is how I describe preferred shares:  it’s a hybrid between a bond and a stock.  With “preferreds” you get the elements of a bond (through fixed income) but you also get some upside with capital gains.  Thoughts?

Mark, I like that.  We’re all familiar with the term common stock (or common shares). The TSX is full of familiar ticker symbols, like RY (Royal Bank), MFC (Manulife Financial), and ENB (Enbridge), to name a few. But when you search “RY”, for example, have you ever noticed this list?

Preferred Shares


This multitude of “RY.PR” symbols refer to various series of preferred shares.

I like this definition of preferred shares:  consider it like VIP shares in a company:

  • As an owner, you get the first crack at any dividends issued by the company ahead of any common shareholders.
  • In addition, when a preferred share is first issued, the dividend yield is both fixed and at a higher rate than the yield for common shares. For example, the common share RY (Royal Bank) is currently yielding around 4%, whereas the preferred share PR.I has a fixed cash dividend of 5%.
  • Lastly, should a company become insolvent, preferred shareholders get paid ahead of common shareholders upon the liquidation of assets.

Fair points Matthew – but I like my income and capital gains from my common stocks.  I don’t think preferreds have as much upside as common stocks do long term.  I also believe companies that increase their common stock dividends can be far better long term investments.  Preferreds offer no such ability.

What’s your take?  Why should I consider preferred shares for my portfolio?

Mark, given your existing holdings with what, 30+ Canadian dividend paying stocks (?) – this is a great question.  Actually, it’s a great question for many folks to ask, particularly Boomers since their search for yield has never been more prevalent.

Before I answer your question – let’s go back to the difference between preferred shares and common stock. Since preferred shares offer a fixed dividend rate they are classified as a fixed income security, and as such, belong to the fixed income portion of your portfolio.

Second, it’s important to note a recent key shift in the structure of the preferred share market.

Prior to the credit crisis of 2008, the majority of preferred shares in Canada were known as perpetual, meaning they had no fixed maturity date and could be called back by the issuer, for par value, at any time in exchange for cash. The high yields protected perpetuals from downside risk, whereas the possibility of getting bought back by the issuer at par value hindered the potential for any upside capital gains. Thus, to your earlier point about limited capital upside, price movements among perpetuals were typically quite minimal, with values remaining close to their initial issue price.

During the credit crisis, however, confidence in the financial sector plunged, and investors were no longer sure if the issuers of these perpetuals would ever be able to buy them back at par value. As a result, the value of perpetuals plunged.

Following the credit crisis interest rates hit all-time lows, and with the only direction to go being up, investors wanted a product that would protect them from rising interest rates. As such, the rate-reset preferred share was created.

In short, the rate-reset can still be bought back by the issuer, but investors now have the option to “reset” their dividend yield every 5 years at a rate equal to the Bank of Canada’s 5-year bond, plus a premium. For example, if in 5 years the Bank of Canada 5-year bond yield is up to 3%, and the preferred share issuer offers a 3% premium, investors will have the opportunity to reset their dividend to 6%. (Note: the value of the premium and time horizon until being eligible for a reset varies depending on the issuer, however, it’s typically every 5 years).

With this new-found protection against rising interest rates, the popularity of rate-resets surged, and the majority of the Canadian preferred share market quickly shifted to the rate-reset format.

However, since the Bank of Canada unexpectedly cut interest rates twice in 2015, rate-reset preferreds got dramatically oversold and their market value got hammered, dropping approximately 33%. Investors who foresaw the eventual rebound of interest rates were able to lock-in dividend yields north of 7% while they waited for market values to return.

Since rates bottomed out in early 2016, and with the Bank of Canada now on pace to raise interest rates for a third time this year (time will tell…) rate-reset preferreds have been one of the best performing asset classes on the market, up approximately 28% from their bottom in early 2016, all-the-while paying an attractive 5%+ dividend.

Preferred Shares 2


So, to answer your original question, should you consider them for your portfolio?  I think you should since you can earn an attractive yield while capitalizing on an oversold asset class that will produce capital gains in a rising interest rate environment.

Alright Matthew, a compelling case, but what are the upsides and downsides of owning preferred shares?  With common stocks shareholders don’t have to worry about interest rates as much due to the lack of fixed income component.  Often the elderly, buy preferred shares for “safety” only to see their investments decline significantly in value when interest rates change.  People somehow equate preferreds with the bond component as safe.  That’s hardly true.

Mark, you’ve raised a very important point.  As we can see from the chart above, owning preferred shares in a declining interest rate environment is not conducive for capital gains.  However, we know interest rates will not stay at zero forever.  So, as interest rates (slowly) continue to rebound we will experience additional capital appreciation among rate-reset preferred shares.

So if I was to hold preferreds, at all, I would consider owning them in registered accounts first, to maximize those accounts before non-registered.  What’s your take?

That’s always a good plan – to maximize contributions to your registered accounts first (e.g., RRSP, TFSA, RESP for kids) before investing in a non-registered account.  But it’s worth mentioning for readers unlike bonds, where interest is taxed at your full marginal tax rate, the dividend income from preferred shares qualifies for the Canadian Dividend Tax Credit.  I know that’s something you highlighted here.

So, if your registered accounts are already maxed out, preferreds can have a non-registered home.

Matthew, given the structure of “preferreds”, I really don’t see a compelling reason to own them right now.  I mean, I think it will be decades if/when bond yields are modest.  So why the rush to own them if the capital upside won’t be there?

Your concerns regarding the outlook for bond yields are quite valid Mark. Ultimately, like any type of investment, the decision to own preferred shares will depend on your personal feelings, views on where the market is headed and of course what your financial plan says you should do. 

(Editor’s note:  financial plans should come before financial products).

Back to what I wrote about above, you now know owning old-style perpetual preferred shares is certainly not a great option. However, given the unique structure of rate-resets, these type of preferreds are poised to largely benefit in a rising interest rate environment.

o, my question back to you is:  where do you foresee interest rates going?

Matthew, I really have no idea.  They could go up, down, stay flat, rise a bit, then fall, spike only to dip again.  Like the weather tomorrow, I really have no idea.  So, I don’t speculate on that stuff and I don’t invest in them for this interest rate risk.  If I had to guess, rates will probably go up over time but it’s going to be a very long road (as in decades) largely due to demographic reasons.

Mark, I’ll offer my take.  Looking back, historically the Bank of Canada will typically raise multiple times in a continuous cycle over the course of several years. If we look at the last 4 rate-tightening cycles here’s how the data plays out:

  • 1999–2000: 4 rate hikes over 2 years.
  • 2002–2003: 5 rate hikes over 2 years.
  • 2004–2007: 10 rate hikes over 4 years.
  • 2010: 3 rate hikes in 1 year.

From this data, we can reasonably expect to see approximately 3 to 6 increases over a short period of time.  Will it happen?  Will we ever get back to the days of 16% interest rates? I highly doubt it as well but I suspect it will go up again over time.

BoC Benchmark Overnight Rate – Since 1991

Preferred Shares 3

Looking at the long-term trend, interest rates have bottomed-out.  Things seem to be on the rebound. As long as the Canadian economy continues to outperform, and job growth stays strong, I don’t foresee the Bank of Canada having any reason to abort its tightening cycle anytime soon.

We’ll see though Mark.  After two rate increases already this year, what happens with the next decision will come as soon as October 25th.

BoC Interest Rate Decision Calendar – 2017

Preferred Shares 4


In any event, to your interest rate risk, as long as interest rates aren’t trending downwards I believe there is merit in holding preferred shares.  For sure, you may not realize much in terms of capital gains when compared to common stocks, but you’ll collect a nice dividend, which is more than double the yield on any current bond or GIC.  It’s important to highlight preferreds are not bonds though. 

Absolutely not.  OK, let’s wrap up this essay on preferred shares Matthew.  Do you personally own preferreds and if so, which ones?  (Disclosure – I don’t own any.)

Yes, I do own preferred shares as they make up approximately 45% of the fixed income portion of my portfolio.  Earlier I showed you there are almost endless options when buying preferred shares. For this reason, I strive for simplicity and have opted for some of the various preferred share ETFs available on the Canadian market. The three that I own are:

iShares S&P/TSX Canadian Preferred Share Index ETF

  • Invests in Canadian preferred shares
  • Symbol: CPD
  • Current yield: 5%
  • Distribution frequency: Monthly
  • Geographical weighting: 100% Canadian.

iShares S&P/TSX North American Preferred Stock Index ETF (CAD-Hedged)

  • Invests in a diversified basket of U.S. and Canadian preferred shares
  • Symbol: XPF
  • Current yield:6%
  • Distribution frequency: Monthly
  • Geographical weighting: 50% Canadian, 40% U.S., 10% Global.

BMO Laddered Preferred Share Index ETF

  • Invests in a diversified basket of rate-reset Canadian preferred shares
  • Symbol: ZPR
  • Current yield: 6%
  • Distribution frequency: Monthly
  • Geographical weighting: 100% Canadian.

I own CPD for exposure to the Canadian preferred share market. I also like XPF because it largely benefits from rising interest rates in the U.S and is hedged to Canadian dollars, therefore no need to worry about currency exchanges. ZPR is the newest of the three ETF products, and I purchased it as an experiment to see how it would perform in relation to the others. To my surprise, it has been my top performer.

Preferred Shares 5

Matthew, I want to thank you for this detailed look at preferreds based on your perspectives – and inspiration to get this subject covered on my site.

For the time being, I’m going to stick with my common stocks and some low-cost ETFs for my portfolio.  I believe things remain more simplified within my investment portfolio this way.  Besides, I’m in my asset accumulation years.  In these years, I’m counting on dividend income, and dividend increases, I’m also counting on capital gains as much as possible as well.  I suspect for retirees or folks depending on some fixed income, preferreds can offer some steady income and deliver lower volatility than common stocks – certainly a consideration for some income investors depending upon the construct of their financial plan including their risk tolerance.

Thanks for doing this comprehensive post with me and I look forward to chatting about more personal finance and investing topics with you in the future.

What’s your take on preferred shares?  Do you own them?  Why or why not?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $700,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

169 Responses to "Preferred Shares – Is this the new replacement for fixed income?"

  1. This is a fantastic Q&A on preferreds. My understanding on this space has been limited and spent a bit of time learning about preferred shares last year. Who knew, I was looking at it right at the right time and couldve caught the bottom?! Anyway…there were still some aspects that I was not grasping and this article clears it up. Definitely going to take another close look at preferreds for the fixed income portion of my portfolio.

    Thanks Mark & Matthew.


  2. Interesting but I’ll stick with my DG stocks. The term Preferred really doesn’t fit my definition especially if one considers that those so called preferred’s Don’t provide any dividend growth and very little capital growth. RY was mentioned so I looked at some of RY’s at:
    Hit the + beside Series W. You’ll notice the dividend has been 0.30625 since April 25, 2005. Interestingly the dividend of the RY Common stock (click on Common stock at the same site) was 0.275 April 2005 then 0.305 July 2005. The W series ends at July 26, 2016 with the same 0.30625 where as the Common grew to 0.81 over the same period. A 185% growth difference.
    Which would I rather own, or better yet which would you rather have owned over that period?

  3. Thanks for your feedback. Some great points you make here. I completely agree that the common stock has done incredibly well over the past decade. Just keep in mind that preferreds are a fixed income security whereas the common stock is an equity, so we can’t expect the same type of performance. Preferreds are best compared with fixed income instruments like bonds or GIC’s.

    1. @Matthew: for those who feel the need for fixed income holdings, ok, but I hold none and never have. If one is investing over the long term I prefer to invest for Income and Growth, which I believe is the path to achieve ones secure future.

  4. Interesting post. I’ve been down the road of reset preferreds and very unlikely to go back. I still have 1 moderate postion but it will be gone next March. They are very complex animals that have most of the market risk of equities but much less upside, and lack the safety of other true FI instruments that can increase in value during market downturns (bonds). (Not enough of an alternative to equities) For anyone seriously considering them I would agree an ETF is probably a better choice than an individual holding (s), but I would still encourage investors to spend a good deal of time studying and follow someone like James Hymas first. I have but definitely haven’t graduated. Also the rates indicated above aren’t accurate. They’re actually lower and a person also has to consider some hefty MER’s.

    In reference to the comparison comments it is probably fair to say it has been a very favorable period for commons and an unfavorable period for preferred and this may well not always be the case.

    Also I didn’t do a lot of digging but pretty sure CPD isn’t strictly a reset pref. ETF. I believe there’s still a healthy dose of perpetuals in there.

    1. I can’t see myself owning preferreds right now for two main reasons: 1) not as much capital upside and no dividend growth and 2) via ETFs the fees are far too high. Looking at 10-year returns (although hindsight is always 20/20) I would have done MUCH better owning common stock and/or low-cost ETFs like VTI, VYM, etc. Thankfully I’ve owned the latter.

      “In reference to the comparison comments it is probably fair to say it has been a very favorable period for commons and an unfavorable period for preferred and this may well not always be the case.” Totally agree. Seasons change!

      1. I agree with what you’re saying.

        However, this may well be a time to own resets….if interest rates continue up???, but they are indeed a strange beast to understand and analyze.

        Seasons change for sure.

          1. That’s a reasonable question. I’m also more inclined towards that philosophy especially as I age.

            However, the answer is possibly – simple may not always work “best” for every person depending on their goals, investment knowledge, etc.

            A broad market equity ETF may be simplest but is it the “best” for every person?

  5. The only advantage I see with preferreds over fixed income (bonds) is the higher yield. Performance-wise CPD, XPR and ZPR have done ok over the past 20 month but earlier returns were downright miserable. What good is a 5% to 6% yield if your capital is in a long term decline?

    I feel a more defensive solution for the yield hungry crowd are the covered call ETFs offered by BMO. They not only offer good safe yields but also less volatility, better downside protection (via the covered calls), modest dividend growth and greater performance over the long term. If held in a non-registered account they also offer a greater tax advantage than preferreds, because the covered call portion of the dividends are taxed as capital gains rather than dividends.

    1. Same Bernie re: “The only advantage I see with preferreds over fixed income (bonds) is the higher yield.”

      You have to watch the financial fees and MERs as well.

      I haven’t read-up or researched much on covered call ETFs offered by BMO but I know those products seem to be popular with retirees. BMO has a partnership with yours truly so I should talk to them about a post here. Definitely advantages for the covered call portion of the dividends taxed as capital gains rather than dividends; lower form of taxation the longer you hold them so I can see the appeal.

      Do you own covered call ETFs Bernie?

      1. I own one ETF…a full position, or 2.5% weight by income, in BMO US High Dividend Covered Call ETF (ZWH). It hasn’t performed quite as well this year because its unhedged but regardless covered calls are very good defensive plays. I hold this one in my RRSP along with 34 (soon to be 37) dividend growth stocks and one mutual fund. I’m well aware of the fees & MER. I rarely worry about them because I’m more about quality and performance. As is the case with all funds, fees & expenses are factored in before $ distribution payments and before performance numbers are reported.

        1. “I hold this one in my RRSP along with 34 (soon to be 37) dividend growth stocks and one mutual fund.”

          At last count, I’m around 40 stocks – about 30 CDN and 10 U.S. and then VYM for extra diversification. I guess I worry about fees because I’m in my asset accumulation years – fees matter!

          Cheers Bernie.

          1. Fees matter only when comparing with vehicles of similar holdings. Fees are irrelevant if a low fee fund is outperformed more often than not plus over the long term by a fund with higher fees. Case in point Mawer Canadian Equity Fund and Mawer Balanced Fund vs their equivalent index benchmarks.

          2. “Most funds do not match their benchmark over time.”

            Generally, yes most broad market indexes outside of Canada underperform their benchmarks. Several Mawer funds outperform their benchmarks but they are far from the exception.

  6. I hold fixed income (bonds and cash) in my portfolio for downside protection and for re-balancing possibility when market is down. Looking at preferred down with the common shares when market crushed, I feel it does not serve the purpose of fixed income for me.

  7. Had a look at Wilson’s website after reading his contribution. Heads and tails, both in quality and competence, over the last third party interviewee. You don’t get referrals from companies such as Coke and Nestle by being a hack. (side note: I enjoy his website — not necessarily the content, but the layout and navigation is exceptionally clean and easy.)

    A few things I like about his recent interest rate article (which meshes with this pref shr article):
    1 — he took the time to analyze the rate cycles; we have rather short memories so this is a good portrayal of the whole process and where me might be headed.
    2 — he recognizes increased corporate debt costs, which can (and most likely will) effect dividend payouts.
    3 — he notes the “competition between bonds and equities” (mirroring my recent statement that I’d be looking at investing in debt in the future now that rates are on the rise). He’s the first columnist within the PF realm I’ve seen mention this market phenomenon.

    In regards to the topic matter, for most of 2016 I held the CPD ETF (iShares Canadian Preferred). Did ok, nothing spectacular. If one decides to enter in the pref shr market, just know what it is you are buying (e.g. how they function (‘share’ is a bit of a misnomer), what they are and what they are not, etc.). Rate-reset prefs are definitely something to look into — it’s basically an investment in math (vs opinion of the future).

    1. Matthew seems to know his stuff, so I appreciated his collaboration on this one.

      Long-term, I simply don’t see how CPD could perform better than a basket of CDN dividend paying stocks. I looked at the MERs and the preferreds CPD holds, and I believe over the last 10 years the performance (favouring common stocks vs. CPD) is a no-brainer. It will likely be the same going-forward for the next 10 years. Just me!?

  8. Like to thank you for this article – as I could not have explained it any better. Well done to the both of you. If you are a younger investor in his\her 20’s then stick with common stock. However, if you are in you 60’s than you will want some fixed income and preferreds are great for that. In fact I like them better (now) than bonds. Great solid income – yield – without the volatility of common shares. (i know, i know you can argue this but wait for when we have an over all market correction – you will see the common shares going down more than the preferreds). Look at it as a more stable income stream.
    OK, so now lets move on to why I like common shares (regardless of age – unless your in your 70’s). Like mentioned above – there is more upside in capital gains and Div increases with common shares – BUT…. its the splits that I LOVE with common shares. CIBC (CM) is due for a split ($108), RY ($94), BNS ($79) and others are ripe for a split. (and we all know what happens after a split – up she goes).

    1. @mike: “OK, so now lets move on to why I like common shares (regardless of age – unless your in your 70’s).”
      75 and 100% Cdn Equities. Has to one fool in the crowd.

        1. I am 75 yrs old and our portfolio is 100% Cdn in 18 stocks. No bonds, etf, funds, preferreds or gic’s. Hold about $35k-$50k in cash. What are suggesting for people over 70?

          1. Do you have a pension from previous work? If so, does it cover all your living expenses? What portion of your funds / income come from fixed income like: CPP, OAS, other, etc? How much are you relying on your Divs? Do u need to cash in each year stock for capital gains $$ to pay the bills? How much is in each account (or income that comes from): RRSP, Non-Reg Act (I would presume your TFSA is maxed – correct?) or are you holding most in a RRSP or a Non-Reg Act?

          2. No Co pension just cpp\oas about $30k. We draw down about $20k in div’s from our DRIP’s. If we need more we take a portion of our rrif withdrawal, but mostly the shares get transferred in kind to the tfsa and joint account. Annual dividends from all accounts exceed $100k. Our annual expenses are in the range between $50k-$75k.
            When we began investing we had Mutual funds, bought & sold, tried to take profits and switched our holdings many times. We did not inherit money but saved over time and the income only began to grow when we switched to Income investing, following the Connolly Report strategy. Tfsa is maxed, and about 60% is in our rrif’s.

          3. There is no way I’m expecting to earn $30k per year from CPP and OAS. 🙂 Good for you to have it!

            “Annual dividends from all accounts exceed $100k. Our annual expenses are in the range between $50k-$75k.”

            Your estate is going to be huge!

          4. Cannew, WELL DONE! So you make over 100K in Divs – use only 20K (for living expenses) and roll the rest each year to the TFSA (in kind) and Non-Reg Accounts? Do you have at least 50K in Divs yearly from the Non-Reg Act (so you have little to no-tax)? {Make sure this is a joint Act – Then you can pull out $50K in wife’s name and $50K in your name with little to NO Tax. Plus easy to deal with in case one passes – other carries on}. Sucks if you have Divs in the RRSP and having to pay tax on RRSP withdraws (better in a Non-Reg Act). So many people built up huge RRSP $$$ only to be taxed on Everything when it comes out (including Divs). I hope you have a larger Non-Reg Act than RRSP. I would consider adding Preferreds at your age for the yield and safer | stable income. Have you considered Reits and others that offer a higher yield with ROC?

          5. @Mike: Unfortunately we do have almost 60% in our rrif’s, which means the withdrawals are fully taxed.
            We do own one Reit (which I regret) as it’s cut its div and our income dropped by almost $5k per year. Chased a bit of yield when we bought it. Should have stuck to the core holdings, But we still bring in much more than needed so it’s not a big deal
            As we’ve owned most of our stocks for some time (and added during low’s) and they have increased their dividend consistently so our yield on investment is quite high, more than any preferred or other fixed income source. Even if all our stocks cut their dividend in half I’d still generate more than needed to exceed expense. With FI you get NO growth of income and capital. My portfolio and income has grown every year, even during the financial crisis.

          6. Cannew, I’m in much the same camp as you although I didn’t begin with dividend growth investing until 2008. I’ve done quite well too. Thanks to exponential compounding from reinvesting my dividends I’ve averaged a little over 9% DGR per annum. The past 3 years its risen to a 12.7% DGR. Once I convert to a RRIF I expect the rate to fall to between 7%-8%. I just wanted to say congrats on your success to date. Only 1 dividend cut? Wow! I’ve had 5 including 2 during the 2008-09 downturn. Perhaps I’ve had more because I have a higher percentage of small-mid caps than most DGIs.

          7. @Bernie: Thanks and good for you as well. We hold a small number of Manulife ($10k) which was the other cut. Like you we’ve seen a lot of DG since the financial crisis. I’m not worried when then the next correction comes, as we have a good margin of safety. I believe our core holdings won’t cut their dividends (though some may not raise them).
            We can’t and probably don’t want to convince others, but let them know that, in our opinion and experience, there is an easier way to invest and to be successful.

    2. Mike, I’m with you.

      I LOVE to see my dividend increases 🙂

      CIBC (CM) is due for a split ($108), RY ($94), BNS ($79) and others are ripe for a split. Bring it on. You reminded me to write CIBC again on this!

    3. “Sucks if you have Divs in the RRSP and having to pay tax on RRSP withdraws (better in a Non-Reg Act). So many people built up huge RRSP $$$ only to be taxed on Everything when it comes out (including Divs).”

      I prefer dividend growth stocks in my RRSP. The growing dividend income exceeds inflation so there is no need to sell capital.

      1. Bernie, no need to differentiate between taking dividends and selling shares. When a dividend is paid, the shares drop by the amount of the dividend, so you have the same number of shares, but there are worth less. If you sell the same value of shares as the dividend, you have fewer shares but they are worth more. The two totals are the same.

          1. Mike, I didn’t say that. When the company pays a dividend the share price drops by the value of the dividend payed out. If you sell a few shares (a home made dividend), you have fewer shares but the share price is more. The two totals (shares + dividends in both cases) are the same.

          2. Yes, the two totals (shares + dividends in both cases) are the same at that moment in time but future income and dividend growth will be less if shares were sold.

        1. @Mike. I realize this. I maxed my RRSP & TFSA accounts before adding to my non-reg account. I have dividend growth stocks in both. My strategy was primarily for dividend growth, but as it turned out, I also outperformed the equivalent equity indexes over the period I practiced DGI.

          1. @Bernie. Nice! Now the trick is to get that $$$ out of the RRSP fast and let it grow in a non-reg account. That way any future Divs and Gains are taxed less or not at all. (depending on all sources of other income)

  9. Just a few fixes to a good interview:
    -CPD owns all Canadian preferreds not just the rate-reset ones. So it will behave based on what the mix of types of preferreds it holds.
    -XPF owns more than just rate-reset preferreds as the US has no rate-reset preferreds
    – There are Canadian rate-reset preferreds domiciled in Canada, but are priced in USD and are based on the US Gov 5 Year bond market. You still get the Canadian dividend treatment though and no US withholding tax. There exist a total of 6 of these kind.
    -Owning straight preferreds are really good in a declining rate environment as they have infinite duration, but are horrible for raising rate environments. Rate-reset and floating preferreds are horrible in a declining rate environment, but great in a raising rate environment.
    -You don’t have the option to reset the rate-reset preferreds. It happens automatically if the issuing company decides not to call them back for par
    -Par is almost always $25 so if you buy a preferred above par you will have a capital loss, if you hold to call, but the dividend may be much larger to compensate.
    -The option that is common among rate-resets and floaters is to convert your rate-resets to floaters or vice versa, on the reset date.
    -There are also rate-resets with what’s called a ‘floor’. ex. you can have a rate-reset that pays 4.17% above the Canadian 5 year rate or a minimum of 5% whichever is larger. However, these may never reset to a higher dividend because the company would most likely just call them back. Thus these tend to act like 5 year bonds.
    -Rate-resets give you a dividend rate based on the 5 year Gov of Canada bond market for 5 years then resets to a new rate based on the 5 year Gov of Canada Bonds at that time. In between the reset dates their is no change to the rate.
    -Floating Rate preferreds typically are based on the Bank Prime Rate or the Gov of Canada 3 month bonds. These reset their rates mostly on a quarterly bases, every dividend.
    -The preferred market is extremely inefficient and alpha can be generated in excess of the costs through active strategies. If you don’t want to do the research for single line items, I would suggest looking at RPF, HFP, and HPR for active managed ETFs. Don’t invest in them if you don’t understand them. If you do want to look at the individual preferreds, the prospectuses will hold the critical info you need to know. Excel spreadsheets help greatly in organizing that info.
    The preferred share market is complex and very unforgiving to those who don’t understand it, but can be very profitable to those who do.

    1. Very detailed comment, thanks!

      re: CPD – yes, owns all Canadian preferreds. Updated post.
      -XPF – kept “Exposure to a diversified portfolio of U.S. and Canadian preferred shares” to align with BlackRock.

      Agreed – owning straight preferreds are really good in a declining rate environment but not a good idea now as rates climb….

      Agreed – “rate-resets” are better in raising rate environment.

      Yes, rate-resets give you a dividend rate based on the 5 year Gov of Canada bond market for 5 years then resets to a new rate based on the 5 year Gov of Canada Bonds at that time. In between the reset dates their is no change to the rate – which is not good since I want my dividends to increase 🙂

      Do you own them?

      1. I do have some rate-resets and have been mostly successful with them. Surprisingly most of my gains in them have been capital gains, but because of the rate increases and future expectations of more rate increases. They’ve outperformed my equities portion by a fair bit so far this year.

        1. Thanks for sharing. For me, that begs the question – if mostly from capital gains, why not common stock or ETFs then?

          “They’ve outperformed my equities portion by a fair bit so far this year.” That’s because the TSX is largely flat.

          1. I believe you answered your own question 🙂 The capital gains are mostly from discounting the future dividends. With anticipated and current rising rates, those higher future dividends make the preferred worth more now. The math on future returns with rate-resets has less variables than commons and thus more predictable. My online discount broker says my trailing 12 month return is 24.71% and I have just over 40% in preferred shares/units. I tend to have a core Canadian portfolio with parts that are alpha seeking. I use ETFs for the US and international parts. Lately I’ve been avoiding bonds, because a 5 year GIC ladder has been yielding more than a 5 year bond ladder. Also, I don’t want to up my duration risk, to get a higher yield, in a raising rate environment. This is in no way a recommendation for others to do as I do, just a poor explanation as to what I’m doing.

          2. Maybe I have 🙂

            I’m just not sure I have much to gain in my asset accumulation years with preferreds. In 10-years, during early retirement, maybe…

            I have 30 CDN stocks (banks, lifecos, pipelines, utilities, etc. – the usual suspects) and then I tending to use VYM more for my U.S. assets and gravitating to owning more IDV in the coming years (vs. VXUS) for my international assets for income. I need to turn on the income taps in another 10 years.

            This is my broad plan:

  10. Garth Turner (old finance minister) says:

    Portfolio should have:

    “So, 2% cash in a HISA, 20% in a mixture of government, corporate, provincial and high-yield bonds plus 18% in preferreds make up the safer stuff. Put 5% in REITs, then hold 16% in Canadian equities, an equal amount in US markets and 23% in internationals, for the growth portion. Rebalance once a year. Put higher-taxed stuff (bonds) in a tax shelter. Reserve the TFSA for fast growers (like emerging markets). Enjoy a 50% tax break on capital gains in your non-registered. And don’t forget about income-splitting with your squeeze, which can be done through a spousal plan or maybe a joint account.”

    FYI: My portfolio doesn’t look like that! (not even close)

      1. He doesn’t get huge declines when the market tanks and his portfolio bounces back quickly. But averages 6-8% yearly over longer period of time. He is older than you and doesn’t want to stomach looking at huge paper losses over a 1-3 market correction at his age. Conservative, Contrarian. Growth with Fixed = Balanced.

        1. I hear ya. FWIW, I’m 100% equities with my portfolio and no fixed income, although to answer your question to cannew, I do have a workplace pension to draw from in my future. 16 years in now. DB. I consider that my “big bond”.

        2. This is the portfolio he and his 2 colleagues advocates for clients. Not sure if Garth invests that way himself- doesn’t matter to me anyhow! They claim to aim for 7%. IMHO, that’s high.

          A claimed 60/40 allocation but with FI he tries to beef it up substituting bonds for a lot of preferreds/some high yield, and for a while was pumping RRBs. (not really a true 60/40 as preferreds are a hybrid (not FI) and with 18% that’s a lot more towards the riskier side). For decades he’s had a bias to preferreds pumping them hard even several years ago right when most tanked 30-50%. Easier to push them after that drop and interest rates on the floor.

          For the equity side typical 20/20/20 CDN/US/INT but he tilts one or two of these a few percent depending on what their crystal ball is saying. From following him somewhat over 5 years or so more often than not the crystal ball has been wrong but I think the 2 “real” financial advisors he hired last year may be helping.

          My portfolio is quite close to that but with only a small amount of prefs, no hi yield, much more cash, and geographically more equal balances for the equity with CDN being the largest.

  11. One additional note on the BMO etf ZPR. It seems that, in light of the dramatic fall in the price of the rate-reset preferreds due to the 2015-2016 interest rate cuts, many of the issuers of rate-reset preferred shares have taken steps to mitigate the downside risk from such actions by issuing new rate-resets using a similar reset formula as previous but with an additional “floor” rate. Thus, if the reset formula for a particular preferred is BOC 5 yr. rate + 3%, most newer issues will include a floor rate of say 5%. Thus, when the reset occurs in 5 years, it will be the greater of the two components of the reset formula. (Ie: BoC 5 yr rate + 3% OR 5% whichever is higher.


      1. From the tenor of comments I’ve heard from most central bankers lately I’d guess that the majority of them want to move away from the near zero or negative (in some countries) interest rates and get back to rates of a more normal level.

        What that magic normal number is, is anyone’s guess but I’d certainly expect it to be above 2%.

  12. Agree. This seems to be where the world is headed and Canada is likely to follow (especially the US). However, Nafta, oil, CDN’s debt, dollar etc etc are possibly factors.

    My crystal ball is truly hazy but I guess between 2 – 2.5%. That’s going to mean a lot of pain for some people.

    1. May def mean a lot of pain for some ppl with big mortgages but on the other hand will make for higher yields on safer investments like gic’s, bonds etc. which should allow a lot of retirees to deleverage out of equities and get back to a more traditional portfolio balance and earn enough to support themselves through a long retirement.

      PS: Some of us can recall having mortgages with rates in the neighbourhood of 15-18% in the 80s and 90s. Even though the Value of the mortgage was less than the average of today it was still a hard pill to swallow.

      1. Hey WB,

        Yes I am retired and with FI so from that standpoint welcome rate increases. Although there is usually a corresponding cooling effect on stocks. 12% or so was the highest I ever saw mid 80’s but had less than 10 years of paying mortgages

        1. I purchased my first home in 1982. I used a mortgage broker to get me the best rate…17% over a one year term…boom! The next year I managed to get 11% over three years.

  13. re: “This seems to be where the world is headed and Canada is likely to follow…between 2 – 2.5%. That’s going to mean a lot of pain for some people.”

    Which is crazy! Ten years ago when I was looking to buy a house, my research said long-term rates (up to ~2005) averaged ~10%. To quote Matthew Wilson’s research, “Between 1990 and 2017 Canadian interest rates have averaged 5.92%” – basically half of the historical long-term average…and now the new normal might be half of that again.

    The crazy part is that rates increasing to a level 75% BELOW historical averages will still cause “a lot of pain for some people.” We might want to include a few corporations, pension plans, and financial instruments in that “people” demographic.

    1. Absolutely 100% correct on all of that!! Good that you actually did research. How many don’t even think of what a couple of percent raise means?

      My 2 personal mortgages ranged I think had between 10 and 12% interest rates. Fortunately they were paid for quickly.

    2. “”Between 1990 and 2017 Canadian interest rates have averaged 5.92%” – basically half of the historical long-term average…and now the new normal might be half of that again.”

      While interest rates might slide up – I can’t see them going to the average of 6%!

          1. Guilty here too.

            Just got in from a wonderful beach fire, had a number of beers too. What am I doing blogging now??

            Got to head to bed now. I know….lame.

  14. “There is no way I’m expecting to earn $30k per year from CPP and OAS. 🙂 ”

    Mark, we’ve had this conversation before. You may not expect it but that’s probably conservative on what you & working spouse will get (PV) if you stop at 50 and wait until age 65. Ours will be 34K (PV) with ~ equivalent # contribution years as that @65. Around 28K @ 60.

    Plug the CCP numbers into any number of calculators, and add OAS.