The bulk of Canada’s preferred-share market was built for a world that never materialized – one where interest rates returned to normal from their financial-crisis lows.
Ten years after the crisis, rates are low and trending lower. That’s why the rate-reset preferred shares that make up about 70 per cent of this country’s preferred-share market have performed so dismally in the past 12 months. Looking for a preferred-share investment with less drama? Consider U.S. preferred shares.
“The U.S. has a bigger and more liquid preferred-share market than we have in Canada,” said Chris Cullen, senior vice-president and head of ETFs at Brompton Group, which runs the Brompton Flaherty & Crumrine Investment Grade Preferred Share ETF (BPRF-TSX). Like the Canadian preferred-share market, U.S. preferreds have many nuances to trip up retail investors. But Mr. Cullen said the typical U.S. preferred-share issue works along these lines: a fixed dividend for seven to 10 years and then an adjustable dividend that is reset quarterly using a benchmark rate, often the London interbank offered rate, or Libor.
BPRF was launched in mid-October, 2018, about the time that the Canadian preferred-share market tanked. This ETF has managed a small gain since then, while funds holding Canadian preferred shares are down 20 per cent or more.
The obvious knock on U.S. preferred shares is that investors can’t use the dividend tax credit to reduce tax on their dividends. Mr. Cullen said mildly higher yields in the U.S. preferred-share market can help offset this disadvantage. However, the better performance of U.S. preferreds in the past year means BPRF has a yield of 4.8 per cent based on its recent share price and targeted annual distributions. Beaten-down Canadian preferred share ETFs have yields above 5 per cent.
U.S. preferred- and common-share dividends received in a taxable account would be subject to a 15-per-cent withholding tax, but Mr. Cullen said Canadian investors can claim a credit for this amount when filing their income taxes. He added that some U.S. preferred shares pay income that is considered interest and thus is not subject to withholding tax.
–Rob Carrick, Globe personal finance columnist
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Stocks to ponder
Aecon Group Inc. (ARE-T). Investors that hung on to shares of Aecon Group Inc. after Ottawa killed its deal last year to be taken over by a Chinese company are seeing some rewards for their patience. Shares of the Toronto-based construction and infrastructure company have risen almost 30 per cent since the federal cabinet invoked national security threats to block the proposed $1.5-billion takeover by a Chinese state-owned enterprise in May, 2018. Ten of 11 analysts still think the stock is a buy. Brenda Bouw reports on the outlook for the stock.
The Rundown
This stock picker is outperforming nearly everybody else. Here’s how he is doing it
When it comes to investing, Daniel Sparks is lighting it up. According to TipRanks.com, his 300-plus stock picks since 2013 have averaged a gain of 26.2 per cent within a year. This performance puts him in the top three of the 6,842 financial bloggers tracked by TipRanks. Prior to obtaining an MBA, the thirtysomething Mr. Sparks worked as an apprentice electrician, entrepreneur, and soldier in the U.S. Army on active duty in Germany and Afghanistan. He currently lives in Colorado and writes for the Motley Fool investing website. The Globe and Mail recently spoke with Mr. Sparks about his investing approach. Larry MacDonald reports (for subscribers).
The week’s most oversold and overbought stocks on the TSX
The S&P/TSX Composite climbed 0.9 per cent for the trading week ending with Thursday’s close and sits 16.7 per cent higher for 2019. The benchmark’s Relative Strength Index (RSI) level of 54 puts it in technical neutral territory between the oversold buy signal of 30 and the overbought RSI sell signal of 70. There are a scant seven index constituents trading with technically-attractive RSIs below the buy signal of 30. Enerflex Ltd. is the most oversold company in the benchmark, followed by Canopy Growth Corp., First Quantum Minerals Ltd., AG Growth international Inc., Pason Systems Inc., Superior Plus Corp. and Secure Energy Services Inc.
Be aware of the costs that come with segregated funds’ guarantees
As stock markets take a volatile ride amid the U.S.-China trade war and the possibility of a global economic slowdown, segregated funds may offer a measure of protection for nervous investors. Segregated funds are insurance contracts that invest in an underlying asset such as a mutual fund, but differ in that they can provide a guarantee to protect some or all of the money that is invested. However, the guarantees offered by segregated funds come at a cost, and advisers say it’s important for investors to understand exactly what they’re getting before adding such a fund to their portfolio. Craig Wong from The Canadian Press reports (for subscribers).
Others (for subscribers)
45 ‘S&P 500 Beater’ stock picks from Citi
Recession watch for equity investors: It’s not different this time
Seeking defensive portfolio picks for turbulent times
Fifteen TSX dividend stocks with growing cash flow
Wall Street keeping close eye on retailers as increased U.S. tariffs are set to take effect
Funds cut stock holdings to lowest level since 2016 as fears of a correction grow
Analysts slashing oil price forecasts as economic uncertainty looms
As U.S. Treasuries sizzle, some bond investors brace for possible sell-off
Friday’s analyst upgrades and downgrades
Friday’s small-cap stocks to watch
Thursday’s analyst upgrades and downgrades
Others (for everyone)
Bond performance amid uncertain markets shows it pays to be boring
Globe Advisor
Trust is crucial in helping investors overcome fear of advisors
Timely investing strategies needed for RESPs
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What’s up in the days ahead
Look for our fall investment guide this weekend. Next week, Gordon Pape will recommend a U.S.-listed REIT for Canadians looking to diversify their income streams.
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Compiled by Gillian Livingston