Given how treacherous preferred shares have been over the past decade, it’s amazing how many investors keep chasing them.
Conceptually, preferred shares sound great: Yields around 5 per cent, which is a massive premium over bonds and guaranteed investment certificates, and a fair degree of security. Only after a company has cut its common share dividend can it suspend payouts on preferred shares.
But preferred shares are a handful for retail investors, a point that was highlighted by this recent question from a reader: “Why is it so difficult for me to buy preferred shares?”
No additional details were provided, but we don’t really need them. Over the years, I’ve seen people encounter these five problems in buying preferred shares:
Liquidity
Many preferred share issues trade infrequently, which means you may have to pay a premium over the market price to buy. The higher the price, the lower your yield.
Terms
There are several different kinds of prefs, and there can be subcategories in each group. For example, the rate reset category (their dividends are typically reset every five years in relation to the yield on five-year Government of Canada bonds) includes shares with a minimum reset yield. For those interested in this type of rate reset, here’s a website to check out.
Research
Considering the high level of interest in preferred shares, there’s a surprising lack of analyst reports and other commentary. Two websites to try are PrefInfo.com and PrefBlog. The investor relations pages on corporate websites are often of little help in trying to make sense of how various preferred shares work.
Jargon
The information you can locate for prefs is often written in the legalese of prospectuses, which means it's hard to digest.
Market data
Any investing website can give you a quote for a preferred share, including the dividend yield. But in the case of floating rate or rate reset shares that are going to be reset in the near term, this yield information has a limited shelf life. Pre-reset yields may differ a lot from post reset.
The most practical answer to these challenges is an exchange-traded fund or mutual fund that holds a diversified portfolio of preferred shares. There’s still work to be done in choosing the right ETF, but it’s a lot easier than buying individual shares.
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