I’m thinking of starting a support group for investors who bought preferred shares and had a bad outcome.
Pref shares figure a lot in stories of investor misadventures that I hear. They punch way above their weight. Bonds and common shares are much bigger presences in investor portfolios, yet pref shares generate more misery.
The latest story of an unfortunate preferred share investing experience comes from a reader who owns three different preferred share issues, all from blue-chip players in the financial sector. “I have held these preferred shares for a number of years and these stocks have been in the loss column for a long time,” this reader writes. “I do not see them moving in a positive direction. My question, should I sell them now?”
Here’s the argument for keeping these shares: they reliably pay dividend income and there’s little risk of that changing. In a taxable account, this dividend income benefits from the dividend tax credit and thus produces a better after-tax return than bond or GIC interest.
Here’s the argument for selling: buying individual preferred share issues is one of the most difficult tasks in investing at the best of times. Today, with interest rates acting in ways that confound most observers, it’s harder than ever to get a good outcome from individual pref shares. Rising rates are bad for perpetual preferred shares (they pay a steady dividend) and falling rates hurt the price of rate reset preferreds (the dividend is adjusted every five years to reflect changes in interest rates).
You have to know what type of preferred shares you own, and the terms specific to that issue. It’s a lot to handle, in large part because the only sources of information are jargon-filled prospectuses. There are analysts who cover preferred shares, but their work isn’t easily available unless you’re a client of their firm.
Part of the thinking on whether to sell something in your portfolio is whether you can find something better as a replacement. I suspect this reader can do just that, whether it’s a diversified preferred share exchange-traded fund or something entirely different, maybe corporate bonds or dividend-paying common shares.