Doug Grieve

Preferred Shares. Historically, investors would buy preferred shares, something like corporate GICs and put them on the shelf. They got paid a dividend income, a little bit better than GICs, of good strong companies. Over time, different types of preferred shares were invented and have become a little more complicated. What was very popular, and still is, was the fixed reset preferred share, which designed to perform well. Every 5 years it gets a new reset coupon, which is determined based on a spread over Government of Canada 5-year bond yield. In 2015, people were generally anticipating interest rates to go higher, so the resets seemed like a great product. However, 2 years ago, the price of oil dropped significantly. This was a concern. The Bank of Canada was committed to stimulating the economy, and they started cutting rates. The structure and the built-in spreads of these fixed resets didn’t really support that environment. With this, your 4.5% return turned into 2.5%. There was tremendous selling pressure. At the end of the day, it was really oversold, and smart money started stepping in, recognizing value.

Issuers have now introduced new products with attractive yields, but with a floor feature. If, what happened back in 2015, happens again, these products are protected. Even though it is a rate reset, if you get inflation, you get the benefit of the new rate. If it starts going lower in a deflationary environment, they guarantee you the minimum yield. It’s a great feature and something that has been very well received.

Preferred Shares. Use this as a GIC? This company has a huge presence in the preferred share market, with several different types of structures. He is a little hesitant on this. There is a newer one with a floor feature, an investment grade product. However, there are some out there that are still quite volatile, vulnerable to a change in an interest rate environment. He would recommend that you really know the specific issue that you have. You want to be really careful in your selection, and possibly get some professional help. He is underweight holdings with this company.

Preferred Shares. This would be one of the stronger preferreds he would be quite comfortable with. It’s a great issue to own. Relative to the rest of the market, it has a very big coupon of 5.9%, compared to the general run of the market of about 5%. This issue weathered the storm much better than the rest of the market over the last few years. It is trading at a significant premium to the $25 par value.

Using rate reset preferred shares as a strategy for increasing interest rates. Because resets are also perpetual (with a reset every 5 years) isn’t there a risk if the yield curve steepens? Traditionally, if the yield curve steepens, long bonds get creamed, so if you own a perpetual preferred share, and you get a real inflationary environment, you are at risk. The 5-year reset though, really captures the 5-year bond yield, and does so every 5 years. If your yield curve starts steepening significantly, your reset coupon is actually going to become more attractive. It is going to respond to the steepening of the curve.

Preferred series K, 4.9%? This company has a number of preferred shares outstanding, and he believes the K series has the floor feature which is relatively new. He would call this a great issue. You’ve got the coupon, you’ve got the floor feature, so you are protected.

How will rising interest rates affect this? This is a “rules based” ETF and is made up of 100% fixed reset preferred shares. In theory, in a rise in rates, this would perform well.

Questions for a broker on a new preferred share issue? You should start with the issuer. You want it to be a household name that you and your broker are comfortable with. From there, he would shift right over into structure. Does it have the floor feature? How will it perform in a dropping interest rate environment? How will it perform in a rising interest rate environment? Alternatively, you could use a managed solution with a niche fund in the preferred share space giving you a diversified portfolio with a great yield.

A US$ Canadian issued preferred share eligible for the dividend tax credit in order to park some US dollars? There are some, but not many. Enbridge (ENB-T) has 4 US$ Canadian preferred shares. They trade on the TSX, but are in US$s. He has 4 of these in his funds and really likes them. Alta Gas (ALA-T) also has one.

This company’s preferreds are really broken down into 2 types of resets. 3 have a fixed reset and the rest do not. BCE has generally been pretty fair resetting their coupons, but all of the group are trading between $.50 and $.70 on the dollar, all at a discount. The problem is, there are so many of them that the whole group needs to move. Their running yields are around 4.5%, and have been resetting in and around 4.5%. With this, you are really making an interest rate call and using BCE as your credit.

Preferred series IV 5.2%? This is a good credit, but it is investment-grade rated by the credit rating agencies, and is a credit he is comfortable with. This specific issue is a straight perpetual, so from a deflationary standpoint, it is pretty defensive. It will do well if you think rates are going to go down. If rates go up a little, you are in great shape as well. It trades at around par with a running rate of around 520.

Preferred Series H. Trading at around $16, and got really beat up on the downturn, but recently he has had a nice recovery. He chose this because he thinks rates are slowly going to rise.

Preferred Series V. This is a US$ one, but it gets the dividend tax credit. It has had a tremendous run, and he hasn’t sold a share.

Preferred Series V. A new issue that has just been trading for a few weeks. It does not have a floor feature, because banks are not allowed to do so. Has a 4.5% coupon.