If I were to pick one asset class that appears to have disappointed Globe readers the most in recent years, it would be preferred shares.
Sample complaint: “I hope you will soon write an article about preferred shares, why they are doing so badly, what hope there is they will recover and possibly when or whether it's time to abandon them and suck up the loss to put the money to better use.”
No question, preferred shares have been incredibly frustrating. The S&P/TSX preferred share index plunged last fall, rallied early in 2019 and then started to fall again. The loss for the index last year was 8.4 per cent, and that’s a total return with both dividends and share price changes included.
Most preferred shares are of the rate reset variety, which thrive when there’s an expectation that interest rates will rise. There’s a growing sense that rates will remain flat or even decline as economic growth slows – that helps explain the latest weakness in the pref market.
It’s time to pack it in if you’re a preferred share holder who is focused on the share price rather than the dividend. Prefs have delivered strong gains at certain points, but the primary reason to own them is for the highly reliable dividend income they pay, and the tax advantages dividends get in non-registered accounts. If a company falls into financial difficulties, it will cut preferred share dividends only after axing the payout on common shares. Defaults on preferred share dividend payments can happen, but they’re rare if you stick to quality companies.
If you’re bugged by the idea of preferred shares fluctuating in value, skip the aggravation and instead look at blue chip common shares that pay dividends. Their prices can fluctuate more than preferred shares, but there’s much more upside potential for the shares. The best dividend-paying common shares offer one other benefit – dividend growth on an annual basis.
It’s worth noting that none of the recent difficulties for preferred shares are based on concerns about their ability to keep pumping out quarterly dividend income. If you want highly reliable dividend and aren’t worried about twitchy share prices, then prefs are a hold.