Randy LeClair is managing director and a fixed income strategist at Manulife Asset Management.
Top picks:
Enbridge Inc.
We are
looking for opportunities to diversify away from the heavily weighted financial
sector in the rate-reset side of the preferred share market. Enbridge
provides a means to get into the energy distribution sector with a solid
company with a strong track record. This particular preferred share issue
is trading slightly above its par value ($25.39) and a current dividend yield
close to 4 per cent (3.94 per cent). In addition, the redemption or reset will not
come until Sept. 1, 2018, which provides a way to lengthen the maturity
profile of your portfolio.
Great-West Lifeco
This was
a recent new issue in the "perpetual" preferred share space. A
high quality Canadian life insurance company, Great-West is a way to have
non-bank financial exposure since the banking sector will undergo significant
change in the preferred share market over the next couple of years. This preferred
share came with a large fixed dividend of 5.4 per cent. It has a long period
(until March 31, 2021) before it can be "called" (redeemed) by the company
back at the original $25 par value however it can be redeemed earlier by the
company (2017) at a premium to par. Current yield is 5.12 per cent with a yield to the
longest call date (in 2021) of 4.75 per cent.
Canadian Utilities
Is another recent new issue perpetual preferred share and opportunity to diversify
into other non-financial names in the preferred share market. The company
is in the regulated electric and gas transmission business, along with some
regulated and unregulated energy generation assets. The company profile
provides a stable cash flow and a diversified asset portfolio. Similar
to the recommended Great-West issue, this preferred share came with a decent
fixed dividend of 4.9 per cent. It has a long period (until Sept. 1, 2021) before
it can be "called" (redeemed) by the company back at the original
$25 par value however it can be redeemed earlier by the company (2017) at a
premium to par. Current yield is 4.74 per cent with a yield to the longest call date
(in 2021) of 4.56 per cent.
Past picks: Aug. 4, 2012
Co-operators
General Insurance Company
Then: $27.10
Now: $26.97
Total return: +6.2 per cent
RONA
Then: $25.10
Now: $24.83
Total return: +4.2 per cent
Aimia
Then: $26.60
Now: $26.03
Total return: +3.9 per cent
Total return average: +4.77 per cent
Market outlook
The
current economic environment of low growth, tame inflation, relatively high
unemployment, no wage growth and a consumer that has high debt levels; is
supportive for a low and stable interest rate scenario for the next six to 12
months. It's difficult to imagine interest rates moving substantially
higher in the near term. Corporate bond yields and preferred shares
continue to offer great value versus government bonds in this scenario and
should provide stable, positive returns for the remainder of 2012 and into 2013.
Watch Mr. LeClair on BNN.