Being the sucker for cash flow that I am, I probably invest in a little too much debt. Being in my mid 20s, according to conventional wisdom I should have about 75% equities and 25% debt. (100 minus your age being the equity percentage, but you probably figured that out) I’m probably a little closer to 50/50, yet I’m quite okay with that. I want to take good long term positions in long bonds/preferred shares in great companies, forget about them and collect my dividend. Once a year I’ll have a look at the company to just make sure it’s not experiencing any real operational issues. This was the thought process behind my purchase of Roger’s Sugar. (BTW, I still hold Roger’s)

While watching Market Call the other day, the guest was asked a question on Yellow Pages income trust. The nature of the business, for those of you¬†unfamiliar, is pretty self explanatory. Besides being in the phone book business, they also own Trader Media which publishes the Auto Trader magazines and website. Being that the company recently cut their distribution from close to 10 cents a month to less than 7, the guest wasn’t in love with the common shares. With the income trust conversion stuff coming up soon, I agree that now isn’t the time to buy a new position in an income trust. He did mention, however, that he liked the preferred shares.

After doing a quick search, I discovered the series c preferred shares that had a yield of over 7.5%. Those are the kinds of yields that Financial Uproar gets a little excited about, so I decided to do a little digging. I’m glad I did.

None of what I found is really bad news or anything, it’s just something an investor should know about before pulling the trigger on a trade. The dividend is $1.7250 per share, until June 30th, 2015. The rate is then reset to the yield of the 5 year Government of Canada bond plus 4.26%. This is a fairly common practice by companies since investors know what kind of premium they’re getting compared to government debt.

This issue is also callable anytime after June 30th, 2015. What that means is the company can repurchase your shares at par value (which in this case is $25.00) leaving you out of luck. A shareholder would also have the option of converting their shares at that point to the next series of preferred shares which pays out a more disappointing dividend of the Government of Canada 3 month T-Bill rate plus 4.26%. Obviously the company is hoping that this issue is only a 5 year deal.

This is why you have to read the prospectus before buying any preferred shares. Investors generally believe that preferred shares are perpetual, with the terms always staying the same. This is almost never the case. The prospectus can be found with a little digging on the company’s website and should be the first thing you read before investing in a preferred share.

Even though you have to be careful, preferred shares can be a great tool in a portfolio. They allow an investor to take smaller positions than a brokerage will usually allow you to take in a bond. If you stick to the good issuers, you should be able to minimize capital losses. Companies usually have to defer the dividend payment if times do get tough, so if they recover the investor still gets paid. And there are a great deal of preferred shares to choose from, in both Canada and the U.S. They deserve at least a look in your portfolio.

I do not own any shares of Yellow Pages preferred stock, but I will most likely be buying some very soon.

Tell everyone, yo!