Preferred Savings

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.

3 thoughts on “Preferred Savings

  1. i would also highlight what divestor has to say about a couple holder retractable prefs in Canada: http://divestor.com/?p=7452.

    I’ve also started to move into some preferred shares in my long term investing portfolio. Some examples are Dundee Preferreds, Aimia Preferreds and DTLA. Obviously much higher risk. But an opportunity for both some capital appreciation and high dividend yield and in the case of each of these there is substantial asset value in order to secure some safety. Some would argue Aimia does not have a lot of value…

    I’ve also been venturing into some convertible debentures. The provide opportunity to get some yield and opportunity to capitalize on stock valuations rising with safety of getting the initial face value back at redemption time.

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    1. I did not highlight (TSE:DRM.PR.A) as I wanted to highlight good short-term savings options and as it is currently trading at a premium to par value it may end up causing a small capital loss if held for a short time.

      I also wanted to stick with what I think are low risk prefs. I own some of the Dundee ones for a long term turn around. I do not like Aimia, seems to risky. I took a quick look at DTLA and was trying to figure out how that investment is organized. Do you know of any explanation of what is going on with the DTLA pref?

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  2. I first heard about DTLA from Bulldog Investors in their two most recent investor’s letters for SPE : http://specialopportunitiesfundinc.com/investor_reports.html. I am a current shareholder of SPE. There are also a couple other good writeups on DTLA here: https://investmenttreats.wordpress.com/2017/11/05/brookfield-dtla-preferred-stock/ and here: http://roaminginvestor.com/2017/07/brookfield-dtla-pfd-part-2/.

    Basically this is a preferred stock that has stopped paying dividends. There are approximately $15+ dividends outstanding and growing at a rate of 7.625% per year. Bulldog Investors has gotten 2 people elected to the board and are pushing for dividends to be paid out. Recently DTLA had an investors day (which i don’t think they’ve ever done before) in which they outlined a liquidation scenario for the company – https://www.dtlaofficefund.com/~/media/Files/B/BrookField-DTLA/reports-and-filings/DTLA%20Pref%20Investor%20Day_May%202018%20FINAL.pdf.

    So basically I am waiting for a large dividend payout and a bit of capital appreciation. I am riding on the coattails of Bulldog as i know they are pushing for a payout and also Brookfield’s involvement in this. I am prepared to wait a long time on this one.

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