Let’s say you have some money that you want to save for a year or two before spending it on a big purchase, such as a house. You want to keep the money safe and since you have a year or maybe more so you would like to make some small gain in the money if you can. Let’s also assume that you don’t have any TSFA contribution room remaining and so any earnings will be taxable, what do you do?
Well the common options are either a high interest savings account or a GIC. You can get 2.3% return on a savings account at EQ Bank, which isn’t too bad. The issue is that if you don’t have extra room in your TFSA then the tax rates on interest are fairly high. If your income is between $46k and $75k in Ontario then the tax rate on interest is 29.65%! If you are prepared to take some modest risk and do a bit of work though then preferred shares are worth a look.
For those not familiar with preferred shares they are a kind of hybrid between normal shares in a company and investing in bonds. They pay dividends like a stock, but also have a fixed par value like a bond. They can come in many forms and have many variations. They can be redeemable by the company, by the holder or not redeemable. They can have fixed or floating dividend rates. They can have voting rights or not. They can convert into stock or not and so on. Preferred shares can be confusing and take some research to understand all the details.
The advantage of preferred shares is that in the $46k to$75k income range in Ontario the tax rate on dividends is only 6.39% and some preferred shares can be quite safe investments if you find the right ones. There is lots to write about concerning preferred shares, but I don’t want to go on too long so I will just list a few that I think are good options for a medium term investment.
(TSE: CGI.PR.D): This is a preferred share issued by Canadian General Investments (CGI). I have talked about CGI before here. These pref shares pay a 3.75% dividend and are redeemable in cash on or after June 15, 2023 for $25 per share. Effectively this makes them five year bonds with a 3.75% payment, but with the tax advantage of paying dividends. The prefs are backed up up by a large fund of investments which I believe makes if almost 100% certain they will be repaid. The price of the shares should stay close to par value if you need to sell them at any time.
(TSE: PVS.PR.B), (TSE: PVS.PR.D), (TSE: PVS.PR.E), (TSE: PVS.PR.F): These pref shares are all offered by Partners Value Split Corp (TSE: PVF.UN) and their details can be viewed here. They are backed up by a large investment in Brookfield Asset Management (TSE: BAM.A) and so should be quite safe. They are redeemable at different times from Jan 10, 2019 to Sept 30, 2024.
(TSE: INE.PR.C): This one is probably better for a two to three year hold. It is not redeemable and so it’s share price will be more volatile. I do not understand why this currently trades for $2 under par. It offers a nice 6.2% yield at the current price and is supported by a fairly large hydro-electric utility company with long term power contracts. I also think there is a fair chance that this will eventually trade closer to par value eventually and so could offer a small capital gain as well.