Preferred Shares in Canada

Generally, Preferred Shares are a type of stock that regularly pays a dividend of a set amount of money out of the company’s profits. On an investment scale, you might consider preferred shares to lay in between Common Shares and Bonds. For most, preferred shares will provide a normal dividend distribution and these are normally paid before a dividend can be issued to the common shareholders. Further, it is often stipulated in the preferred shares articles of prospectus that when a company is unable to pay a dividend distribution due to financial constraints the preferred dividends will accumulate as a liability for the company; this basically means that the preferred shares need to be paid for all distributions that they missed during tough times before any common share holder get a dividend. Further, during a bankruptcy, preferred shares normally have a higher ranking than Common Shares; although this must be stipulated in the prospectus.
During this most recent recession, Preferred Shares have been re-popularized by Warren Buffet. His most notable position was purchasing Preferred Stock in Bank of America (NYSE:BAC) and General Electric (NYSE:GE) during the darkest days of the fall of 2008. These shares did not suffer declines as large as the common stock of these companies and the preferred shares distributions remained the same or accumulated to be distributed during better financial times.

Although the Heading Preferred Stock seems generic, there are many different varieties:

Prior Preferred Stock: If a company has different issues of preferred stock outstanding at the same time, it is common to find some labelled with higher priorities than others. Under this scenario, if a company only has enough money to meet obligations on one of the preferred issues, it only issue a dividend to the preferred labelled as the Prior Preferred or highest priority. As a result, Prior Preferred Stock normally has a lower dividend yield because of the lower risk attached to sustainability of dividend distributions.

Preference Preferred Stock: These preferred shares rank just behind the prior preferred stock. These will receive preference over all other classes of the company’s preferred shares except for the prior preferred’s. When more than one level of Preference Preferred Stock is issued there may again be a ranking.

Convertible Preferred Stock: A Convertible Preferred Stock allows unit holders the opportunity to exchange them for a predetermined number of the company’s common stock. The exchanged is normally allowed at any time an investor chooses regardless of the current market price of the common stock. It is however only a one way deal; once you have converted to the common you cannot convert back. This allows a preferred shareholder the opportunity to participate in significant gains in the common shares.

Participating Preferred Stock: These preferred shares provide unit holders with the opportunity to participate in extra dividends if the company achieves some predetermined financial goals. Normally, if you own these kinds of shares you will participate in regular dividends regardless of how well or how poorly the company performs and if the company does very well you may receive an extra benefit.

Why do Canadians Invest in Preferred Shares?

Basically, Canadian that invests in Preferred Shares are doing so because they wish to hold fixed-income investments in a taxable portfolio. Because dividend income is tax in a preferential way in Canada compared to interest from Bonds, Preferred Shares often result in a greater after-tax return than can be achieved with bonds in many circumstances.

If you currently hold a portfolio that does not have any exposure to preferred shares you may want to consider making some acquisitions. This can be done by simply buying preferred stock of one of the many major companies in Canada or by buying a Preferred Share ETF. I find one of the best ways to find which Preferred Shares are out there take a look at one of the Preferred Share ETFs and research their holdings.

Before embarking on your journey to acquire preferred shares you should read the following article defining the legal implications of Preferred vs Common Shares:

For Example, look at CLAYMORE S&P/TSX CDN PREFERRED SHARE ETF, here is the list with shares listed in order of portfolio weighting:

Preferred Shares vs Common Shares: Legal Implications that must be understood before investing ()

• GREAT-WEST LIFECO PFD 4.8 SERIES E

• MANULIFE FINANCIAL CORP CL A SR 4

• ROYAL BANK OF CANADA 5YR NON CUM RST PFD

• BK OF MONTREAL NON CUM 5 YR RESET B S-23

• CANADIAN IMPERIAL BANK COMM 5.3%

• ROYAL BK OF CANADA1ST PRF NON CUM 5 YR R

• TORONTO DOMINION BK N-CUM 5YR CL A PFD S

• IGM FINANCIAL INC 5.75% N/C SER A PFD

• ROYAL BANK OF CANADA 5YR PFD SER-AR NON

• MANULIFE FIN COR PFD SHARES

• TORONTO DOMINION PFD SERIES M

• MANULIFE FINANCIAL CORP CL A PFD SER 1

• TORONTO-DOMINION PFD SERIES O 4.85%

• BANK OF NOVA SCOTIA 5% SER 20 26OCT13

• CANADIAN IMPERIAL BANK PFD 4.700% SER 31

• BK OF NOVA SCOITA 5% SERIES 18

• CANADIAN IMPERIAL BANK COMM SER 30 CL-A

• BROOKFIELD ASSET MGMT INC 5YR R/R PFD SE

• SUN LIFE FINANCIAL INC CL A PFD SER 1

• BANK OF NOVA SCOTIA 5.25% PFD SER16

• BANK OF MONTREAL PFD 5.2% SER 16

• BANK OF MONTREAL PFD 4.5% SER 13

• HSBC BANK CANADA 5YR RST CL 1 PFD S-E

• YPG HOLDINGS INC 4.25% 1ST PRF 31/03/20

• GREAT WEST LIFECO INC 5.20% SER G

• SUN LIFE FINANCIAL INC CL A SER 2 CUM PF

• BROOKFIELD ASSET MANAGEMENT SER 10 PFD

• BCE INC 4.4% SER AF 16 PREFERRED

• LOBLAW COMPANIES LTD 2ND PFD SER A

• BCE INC. 5.55% PREF - SERIES 19

• GREAT WEST LIFECO SERIES H PFD

• FORTIS INC. PFD 5.2500% SERIES G

• SUN LIFE FINANCIAL PFD SERIES 4

• FORTIS INC CONV/CALL PRFD SER E

• POWER CORP CDA 5.0% 1ST PFD SER D

• NATIONAL BANK OF CAN IST PFD SER 21

• POWER FINANCIAL CORP 4.95% SER K PFD

• BROOKFIELD PROPERTIES SERIES I PFD

• NATIONAL BANK OF CANADA 1ST PFD SERIES 15

• TRANSCANADA PIPELINES PFD SERIES X

• POWER FINANCIAL PFD 6% SER I

• BROOKFIELD PROPERTIES 6% SERIES F PFD

• BCE INC PFD 5.45 SERIES AA

• BROOKFIELD ASSET MGMT SER 12 PFD

• CU INC CUM REDEEMABLE PFD SHS SER 2

• BROOKFIELD PROPERTIES 5.75% SER H

• POWER CORP. 5.35% PREF SER B

• POWER FINANCIAL 5.25% SERIES E

• NATIONAL BANK OF CANADA PFD 6% SER 20

• GEORGE WESTON 5.20% PFD

• GEORGE WESTON LTD 5.2% SERIES IV

• GEORGE WESTON LTD 4.75% PFD SER V

• CANADA LIFE PFD 6.25% SER.B

• HSBC BANK CANADA 5.1% SERIES 5 PFD

• HSBC BANK CANADA 5.0% SERIES D PFD

• WESTCOAST ENERGY 5.60% SER 8 PFD

• YPG HOLDINGS INC 5% CUM RED 1ST PFD SHS

• ENBRIDGE INC 5.5% SER A PREF

• CO-OPERATORS GENERAL INSURANCE CO

• INDUSTRIAL ALL PFD SHARES

Top Online Broker Survey 2010

The results for the Best Online Broker survey for 2010 were recently published by the Globe and Mail. I am beginning to think that there is some sort of a monetary link between the Globe and Mail and Qtrade (Top Dog in the Survey over the past 4 years).
Qtrade does have one of the best research platforms for customers; however, research alone is definitely not the win all for me or most other clients looking for a quality online trading platform. The research that Qtrade does provide is via Thomson Reuters and is available with most platforms so not really anything that outstanding.

When people are searching for an online broker I think the emphasis is on cost followed by better access. Most opening online brokerage accounts have simply come to realize that there broker does not really know all that much about the stock market, so why pay for him/her to throw the darts in the dark when you could do it for less yourself for far less money.

The supposed reasoning behind the Globe and Mails Online Broker Survey is to help new comers find “guidance” for picking an online broker. Sounds like the top ranked brokers will have the most business directed there way by the survey.

To me, this survey has turned into a marketing machine used to direct leads to the highest bidder and here I will explain why and then provided you with the results of the survey.
1) Almost all of the platforms are identical except for some simple rearrangements of where buttons on the screen are displayed. You can rearrange these to you own hearts content though people. I have used a number of the online trading platforms and it turned out all of them used the same system software.

2) Speed of Execution: For the most part they are all using the same ECNs so there should be no time difference. This may be different for some of the big banks.

3) Research is available for all, but some will charge a premium. Not like this research does you that much good when 99% of analysts couldn’t predict the beginning of the most recent recession.

4) Customer Service: some may hold your hand better than others, but this is near the bottom of my wants for an online broker list.

5) Account information is pretty much the same for all except some make it more difficult to figure out by keeping each of your accounts under a different password; not the end all for me though.

6) Website Security is very good for all. If it wasn’t they would be out of business very quickly indeed.

Before providing the results of the 11th Globe and Mail Online Broker Survey here is the list of question they aimed to answer:

• Costs: Account fees and mutual funds are considered, but stock-trading commissions get the most focus.

• Trading: How quickly and cleanly can clients place orders for stocks, as well as bonds and funds?

• Customer Satisfaction: Consulting firm Phase 5 contributed this portion of the ranking through the results of a survey of 1,380 online investors conducted in September. Scores are based on answers to six questions related to how happy clients were with their broker and whether they would recommend it to others.

• Tools: The resources a broker offers to help clients choose investments and develop an overall plan. There's an emphasis this year on helping the many newcomers to online investing.

• Account Information: Grades a broker's ability to allow clients to see how their accounts are doing and perform basic account maintenance.

• Website: Security and website utility are the focus here. It's a given that all brokers in this ranking are members of the Canadian Investor Protection fund, which protects client assets in case a firm goes bankrupt for amounts up to $1-million.

The Results:

1) Qtrade Investor

2) Credential Direct

3) BMO Investor Line

4) Scotia iTrade

5) RBC Direct Investing

6) TD Waterhouse

7) Disnat (classic)

8) National Bank Direct Brokerage

9) CIBC Investor’s Edge

10) Questrade

11) ScotiaMcLeod Direct Investing

12) HSBC InvestDirect

For me, Cost was the most important factor so I use Questrade since they have the lowest fees with no account minimums to get the best price.

For details about the 2009 survey please see the article Best Online Broker in Canada 2009
For details about the 2008 survey please see the article Online Broker Survey: Who Should You Invest With?
The 11th Annual Globe and Mail Online Broker Survey is available at: http://www.theglobeandmail.com/report-on-business/online-broker-rankings/the-11th-annual-online-broker-survey/article1348448/

Another Historic Bankruptcy: CIT Files for Bankruptcy

On Sunday Afternoon CIT Group (NYSE:CIT) finally filed for Chapter 11 Bankruptcy Protection. If you have been keeping up with previous posts on this blog then you know that this is the beginning of the next economic shoe to drop on the World Economy. This is estimated to be the fourth-largest bankruptcy filing in U.S history ranking just behind General Motors and ahead of Enron.

 

CIT Group Inc. (CIT) is the holding company for CIT bank and provides commercial financing and leasing products, and management advisory services to small and middle market companies worldwide. The company holds roughly $71 billion in assets and $65 Billion in liabilities according to the NY-Times. The nightmare the company was experiencing this weekend was the fact that $800 million worth of bonds was maturing from Sunday through Tuesday.

 

According to Jeffrey M. Peek, Chairman and CEO of CIT Group, "The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy."

 

This is still a slap in the face to US Tax payers however. Last year CIT received $2.3 billion in government aid in the form of preferred stock. Now, this will most likely be wiped out through the bankruptcy proceedings and will become the first definitive loss in the governments rescue of the financial system says the NY-times.

 

Despite the size of this bankruptcy, the U.S Government would not provide further support for the company. Earlier this year CIT asked the government for further aid, but was not deemed too big to fail so now they must fail.

 

CIT has approved a pre-packaged bankruptcy filing, which is supposed to be better than a regular bankruptcy according to the company. This still sounds like a hard pill to swallow. Bond holders are expected to receive 70 cents on the dollar, but this still seems very speculative at the moment. I guess those bond holders are not ordained as important as some of the major investors tha4t recently provided another $4.5 billion loan or Goldman Sachs (NYSE:GS) that recently provided another 2.13 billion loan, as I am sure there will be preferential treatment.

 

Before the financial Crisis, CIT was one of the largest nonbank lenders in the world, and was considered a big part of the “shadow banking system” that collapsed when the financial crisis erupted last fall. CIT was hit hard as the economy contracted and unemployment surged. As a result, a huge percent of the company’s loans went bad and CIT was forced to report billions of dollars in losses.

 

The problem I still see here is that commercial vacancies are still up and of the new leases being signed, much lower rates are being accepted. This obviously leads to less capital to service the debts of so many more businesses going forward. So Bankruptcy or no Bankruptcy, this is only the tip of the iceberg.

 

Get ready to weather another storm as more businesses fail since the U.S Consumer is not spending like the good old days.

 

Previous Articles about this subject include the following:

• The Next Economic Shoe to Drop
• How to Profit in a Down Stock Market
• How to Protect Yourself from a Red October
• Double Dip Recovery W or V Shaped Recovery?

Other News Articles About this Topic:

• CIT to file for bankruptcy protection after rescues fail
• CIT Files for Bankruptcy
• CIT Files for prepackaged bankruptcy