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