Preferred Shares

Personally, I do not buy preferred shares. Their negative points are

• Dividend payments do not grow (although they can change or reset.)
• Preferred shares come in all sorts of complex and complicated flavors.
• You can have capital gains and losses on preferred shares, but you do not generally get the capital appreciation you can get from shares.
• The share price will generally fluctuate with interest rates.
• Most preferred shares are callable, but this can get complicated.
• You have to be just a selective in picking preferred shares as you are in picking common shares.

Their positive points are:

• They are generally taxed like other Canadian Dividends, which means at a lower rate than interest.
• Generally preferred dividends must be paid before dividends to common shareholders.
• Generally, preferred shareholders are in front of common shareholders in a bankruptcy situation.

If you want details on any preferred share, this information is generally in the company's annual report. Personally, I do not think it makes much difference that these shares get preference in a bankruptcy because if a company has gone there, few people will get any money.

Some preferred shares do change their dividend payments and these preferred shares are generally called reset and/or floating rate preferred shares. However, because dividends are reset based on some interest rate, the dividends can go down as well as up. You can make similar points about getting capital gains and capital losses on preferred shares. The price of preferred shares tend to be interest rate sensitive, so the shares price can go up or down, although in all fairness preferred shares tend to have more price stability that common shares.

On the Scotiabank web site there is simple guide to preferred shares and they are willing to send you their full guide. The website of Raymond James has a current guide to Canadian Preferred Shares.

The web site Investopedia has a good article on preferred shares as does Wikipedia. There is a fairly recent G&M article on preferred shares by John Heinzl.

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