Tuesday, March 30, 2021

Preferred Shares

I do not buy preferred shares. I like stocks with growing dividends. I first invested to have a second source of income. I also wanted a second growing source of income. I ended up living off this second source of income and still like dividend growth stocks because I want a growing income. I feel you need a growing income because of inflation. However, there are all sorts of investors and some people do like preferred shares and that is why there is a market for them.

Preferred shares come in all sorts of flavours. You can usually find the rules that the preferred shares were issued under in the annual statement. In theory, in bankruptcy, the preferred shareholders are in line ahead of common shareholders. However, bankruptcy occurs because a company cannot pay their debts, so creditor are the winners of any value. So, I do not see any value in being head of common shareholders, but behind creditors.

One advantage to preferred shares is that all due or overdue dividends must be paid on preferred shares before common shareholder dividends are paid.

Preferred shares can be callable or perpetual. The callable ones can be redeemed by the company at a certain time or sometimes at the convenience of the issuer. When they are recalled, you will end up with a capital gain or loss depending on what you paid for the preferred shares and the callable price. Perpetual go on in theory forever, but they can be callable also.

Usually when a preferred is a perpetual, the dividend rate is reset, generally every 5 years. However, reset feature can apply to any preferred shares. The dividend is reset based on current interest rates. The company will state what interest rate it will be based on. This means that the dividend can go up or down at the reset date.

The rules above are just the tip of the iceberg in Preferred Shares rules. If I were to buy any preferred shares, I would go for a plain vanilla sort. The fewer rules and the simpler the product are, the better in my mind. For each preferred share you buy, you really must investigate to see just what you are getting.

In regards to price in shares, it is always relative and one share at $10 might be relatively more expensive than another share at $20. Price does not mean what you think it means when dealing with shares. That is why people refer to ratios to understand the relative prices of shares. A common ratio is the Price/Earnings Ratio (P/E Ratio).

The price of the preferred does not matter. It can be set at any price. What matters is the yield. The yield on preferred shares is mostly set higher than the yield on common shares. This is to encourage people to buy the preferred shares. (Yield, by the way is dividend divided by the price and is similar to interest rates, in a way.) To companies, issuing preferred shares is just another way of raising money. Some companies like this method and some do not.

Investopedia has a number of articles on Preferred shares. There is one about How Preferred Stock work. Another article they have is Why would a company issue preferred shares. There is also an article about Why do preferred stocks have a face value that is different than market value? You can go here to pick up more entries on preferred shares.

On my other blog I wrote yesterday about AltaGas Ltd (TSX-ALA, OTC-ATGFF) ... learn more. Next, I will write about BCE Inc (TSX-BCE, NYSE-BCE) ... learn more on Wednesday, March 31, 2021 around 5 pm.

This blog is meant for educational purposes only and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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