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What are we looking for?

In our recurring quest for yield-generating investment ideas, we turn our attention once again to preferred shares - which, for many investors, represent a dark and murky corner of the market, sharing traits with both common shares and corporate bonds while not entirely resembling either. We have once again enlisted our friends at the Preferred Share Desk of Desjardins Securities in Toronto, to help point us to their favourite picks in the preferred share universe, which has been offering both strong yields and rising prices in recent months.

Desjardins preferred recommended list

Desjardins analysts John Nagel and David Paul have often described their recommended list as a compilation of preferred shares that let you sleep at night. Each pick comes from an investment-grade issuer, which means they are considered rock solid enough for institutional investors to invest in them. Each also has reasonable levels of liquidity, and offers a good balance of risk and return.

Mr. Paul noted that the universe of Canadian preferred shares has posted solid 2.6-per-cent gains over the past month, a move that reflected trends in both the equity and bond markets. The generally upward tone in the equity market helped give preferreds a lift, but perhaps more importantly, credit spreads for corporate bonds have narrowed, reflecting easing risk concerns.

What did we find?

Not surprisingly, Desjardins' list continues to be dominated by preferred shares from blue-chip issuers in the financial sector, where concerns over credit exposure have eased over the spring. Most of the preferred stocks on the list are still yielding more than 6 per cent at current prices, a payout level that looks increasingly attractive as investors' worst market fears fade into the sunset.

While the chart does indicate some pretax yields at redemption - a hypothetical yield based on the assumption that you purchase the shares at their current price, then redeem them on their redemption date at their redemption price - Desjardins doesn't list these redemption yields for most of the issues on its list. That's because for perpetual preferred shares - which have no set redemption date, and are only redeemed if the issuer chooses to do so - the cost would be prohibitive to redeem those shares under current market conditions, so issuers are highly unlikely to do so.