These days, dividend growth investing is more popular than an ice cream cake at a fat camp. In today’s low interest rate environment, finding yield isn’t so simple. Government bonds yield next to nothing. Even corporate bonds have pretty skimpy yields. All sorts of investors are jumping aboard companies with decent dividends and a consistent history of growing that dividend. All this love of dividend growth investing is great and all, but I’m not sure it’s the ticket into the rich kids’ club.
Instead, as I’m apt to do, I’d like to suggest an alternative. Remember when I said I was going to give you actual strategies to grow/invest your cash? Well, today is your lucky day. No word on whether you’ll actually get lucky after this is done. If you’re me, the answer is probably not.
So what’s the key to wealth? Preferred shares of course. These securities get no love from anybody, which is really too bad, since they’re effective income generators. Let’s delve further.
What’s A Preferred Share?
Basically, if a common share and a bond made sweet, sweet love, their offspring would be a preferred share. Do you guys think one of them ends up crying after, like when I have sex? What? I have feelings.
Preferred shares represent an ownership position, but without a few of the benefits that go with it. Preferred share owners don’t get the right to cast their vote at the annual meeting. They also don’t really participate in the growth of the company or have any potential for a dividend increase. The shares are issued at a certain price (usually $25.00 per share) which, like bonds, is referred to as par. As certain events happen, the share price will fluctuate, just like with bonds. If rates go up, the price of the preferred will go down, hence increasing the yield. The opposite happen if interest rates go down.
Preferred shares are much more like bonds than they are stocks. If a company goes bankrupt, preferred shares have a higher claim on liquidation than do common shares. The dividend remains steady, just like a bond payment does. If a company falls behind on their dividend payments, they are required to catch up at some point, unless they go out of business.
There are all sorts of different kinds of preferred shares. There are perpetual preferreds, which, as you probably guessed, continue on forever. Then there are callable preferreds, which can be bought back buy the company at a certain point. There’s also convertible preferreds which can be converted to common stock, at a ratio outlined in the prospectus. The investor decides if they want to convert, and they’re usually free to do so whenever the hell they want. There are also exchangeable preferreds, which allow the company to exchange them with a different issue of preferreds at a certain point.
Preferred shares are somewhat complicated. Read the prospectus. Or, if you can’t read, go to prefinfo. It’s got the visual appeal of a geocities site from circa 1998, but the info on Canadian preferred shares is top notch.
Investing In Preferred Shares
Preferred shares trade on the stock exchange, meaning it’s pretty simple for a moron like you to buy some. Since many issues only trade a few thousand times a day, you’ll want to make sure to use limit orders.
From there, it’s just a matter of finding the best mix of safety and yield. Yellow Pages series D preferreds currently pay out 43 cents per quarter, on a share price of just under $3. For those of you keeping track at home, that’s north of a 70% dividend yield.
Even the dumbest of you can figure out that the market is pricing in a dividend cut. I’d stay away from that one.
Okay, let’s assume you’re looking to start your preferred share portfolio. Here are 5 names that you should maybe take a look at.
Currently yields 5.7%. The company is profitable and has a great balance sheet.
They’re considered an honorary member of Canada’s big 5 banks. The Quebec based financial company yields 6.05%. It becomes a floating rate loan in 2014, but the yield floats at 4.79% above the Government of Canada 5 year bond rate. This preferred share is a good option if you want protection from rising rates in the future.
Yes, the life insurance business isn’t the best place to be right now, considering the unstable equity markets are. Manulife is one of the best in the industry, so you know they’re not going away any time soon. Right now the series D preferreds yield 6.25%. This one also converts into a floating rate preferred in 2014, at the Government of Canada 5 year bond rate plus 4.56%.
Also known as Investor’s Group, the biggest mutual fund rip-off in Canada. There’s no reason for you not to profit from other’s stupidity, as this bad boy yields 5.7%.
What’s interesting about these ones is the ability to use a dividend reinvestment plan (DRIP) to purchase CIBC common shares at a 3% discount to market value. The 5.3% dividend doesn’t hurt either.
There you have it. These are 5 solid Canadian companies that aren’t going away anytime soon. You can buy 100 shares of each, and just let the cash roll in. Six percent may not be a number you’ll get really excited over, but it’s a pretty decent yield on good, secure preferreds.