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Despite all the talk of rising interest rates, investors remain as keen as ever to find higher yielding alternatives to bonds.

One alternative that keeps coming up is preferred shares. “Is it OK to hold preferred shares instead of bonds and GICs,” a reader asked recently by e-mail?

Allow me to present five numbers that support a “no” answer to this question. Each represents an annual loss for the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD-T), which can be used as a proxy for owning a well-diversified portfolio of pref shares.

  • -17.2 per cent: That’s how much this ETF fell in 2008, as the global financial crisis raged
  • -3 per cent: CPD posted this loss in 2013
  • -15.3 per cent: CPD fell this much in 2015
  • -8.4 per cent: This was the loss for CPD in 2018
  • -22.8 per cent: The loss in the first quarter of 2020, when the pandemic arrived (CPD later rebounded that year)

Way back, preferred shares were described as stocks for widows and orphans because they provided a secure dividend income. This aspect of prefs remains true. Companies only cut preferred share dividends after they have stopped paying quarterly cash to holders of common shares. It’s a sign of deep distress to cut the preferred share dividend, so it’s rarely done.

In no way is the income from preferred shares as secure as bond income. But the risk of default with prefs from blue chip issuers is pretty remote. Where prefs fall way behind bonds is in adding stability to portfolios in bear markets for stocks and economic shocks.

The 2008 and Q1 2020 losses for CPD document how pref shares tend to get flushed by investors in chaotic markets. Money goes to bonds for safety, not preferred shares.

Prefs also suffer when the economic outlook turns sour and there are expectations for falling interest rates. Most preferred shares these days are a variety that resets the dividend rate every five years to reflect changes in interest rates. These prefs work well when rates are expected to rise, but they tend to sell off when the rate outlook takes a turn for the worse.

On the basis of investment income flows alone, preferred shares beat bonds. But if you hold bonds to stabilize your portfolio in tough times, bonds are preferred over prefs.

-- Rob Carrick, personal finance columnist

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Stocks to ponder

Russel Metals Inc. (RUS-T) Income investors tend to avoid cyclical companies because of their volatility and unpredictable dividends. But Gordon Pape says there should be a few exceptions to the rule and this dividend-paying metals distribution company is one of them.

AutoCanada Inc. (ACQ-T) Over the past several days, the Edmonton-based car dealership group saw its stock lose about a quarter of its value, as investor attitudes toward the entire auto retail space seemed to sour. The pullback seemed to catch some of the analysts following AutoCanada by surprise. Extraordinary demand for new and used cars in the face of supply constraints has sent car prices soaring, and auto dealer profits along with them. But as Tim Shufelt reports, some investors are voicing concerns that a return to more normal profitability will start soon.

The Rundown

Short sales on the TSX: What bearish investors are betting against

Short sellers ramped up their bets during the month ending Nov. 17, conveying a pessimistic view on the Toronto Stock Exchange’s direction. According to data firm S3 Partners, the short position in the bellwether iShares S&P/TSX 60 ETF (XIU-T) leaped to 19.9 per cent of float, up from 13.8 per cent four weeks before. That seems to be a bold move, especially since it occurred while XIU was climbing to a gain of 3.9 per cent during the period. At the company level, Air Canada continued to top the leader board for the largest of TSX short positions. Larry MacDonald tells us much more about what short sellers are up to.

BMO’s Belski reveals upbeat TSX and S&P 500 forecasts for 2022

BMO’s chief investment strategist Brian Belski is known for being unapologetically bullish. And even amid incessant market concerns about inflation, supply chain constraints, rising bond yields and peak economic growth, he’s not changing his tune as the new year dawns. BMO strategists led by Mr. Belski released their 2022 market outlook Thursday, and while some cooling off from the blistering gains of this year is expected, they still forecast stock returns near double-digit territory. Darcy Keith reports.

Seven stocks that could be buys amid this year’s tax-loss selling season

Many investors with non-registered accounts sell losing stocks at year-end to claim capital losses for tax purposes. This selling pressure can turn cheap stocks into even greater bargains, making November and December a busy time for some value and contrarian investors. Larry MacDonald takes a look at some of the best candidates for tax-loss selling this year.

Latest from the Twittersphere: Stock indexes to track most-hyped companies

What’s the value of being Twitter-famous? Two new stock indexes created by S&P Dow Jones Indices and Twitter are unraveling the mystery, measuring the performance of the buzziest companies for investors with an eye on social media influence.

Also see: Sharp swings in EV shares draws frenzied options trading

Global companies set to deliver record dividends this year

Global corporate dividends are set to reach a record high this year, as a rebound in business activity and a rise in consumer demand boosted profits for most sectors which were hit by the pandemic last year.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: Strategy bets consumer spending habits change as inflation bites

Number Cruncher: 13 outperforming Nasdaq stocks stepping into the metaverse

Thursday’s analyst upgrades and downgrades

Friday’s analyst upgrades and downgrades

U.S. Treasury market could see persistent volatility into year-end

‘Big Short’ Michael Burry exits bearish bet on Tesla

Globe Advisor

How three advisors are protecting their clients’ portfolios from rising inflation

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What’s up in the days ahead

Should investors be wary of insurance stocks amid the flood devastation in British Columbia and signs that more disasters related to climate change are around the corner? David Berman will have some answers.

Gas, inflation and time to hit the shops: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff

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