Rockin' On: Money: Preferred shares for portfolio income and stability

If you haven't gather this by now, let me make this one feature of my investing philosophy very clear; I make dividend paying stuff the backbone of my portfolio. I am constantly on the prowl for good, solid dividend paying investments. I like them to come highly recommended and to fit into my portfolio like a puzzle piece. In other words, they should fulfill a demand, a financial need, in my portfolio.

Preferred shares add income and stability to a portfolio. I didn't realize this until last year. Even at the time I dedicated a chunk of my portfolio to preferred shares, I didn't quite understand the importance of this move. This was one move my adviser at the bank could applaud without reservation.

I stumbled into the advantages of preferred shares when trolling about looking for conservative, dividend paying investments. I found this on the WebBroker site

Four stars, selling at a discount and a nice dividend; Worth a look.

The Claymore S&P/TSX CDN Preferred Share ETF rates four stars from Morningstar and delivers a very nice dividend. The dividend, paid monthly, isn't high enough to make the earth move, but I could dig it. I checked the Performance and Risk screen.


Low risk: After what we investors have been through, low risk looks good.

Low Risk! So the return is only average, the risk is low. This ETF was speaking my language. It was time to learn more about preferred shares. I found the following on the ScotiaMcLeod site, page 42.

Preferred Shares add income and stability to a portfolio.

"Even if the market is not rising, it is beneficial to have investments in your portfolio which generate a steady income. Using preferred shares with a stable dividend source is one option . . .

There are a variety of different types of preferred shares and it is important to understand the features associated with each particular issue. It is important to discuss your specific needs and goals with your ScotiaMcLeod advisor who can analyze your situation and present you with well reasoned recommendations. It's worth a conversation, as preferred shares have shown resilience in volatile markets."

Like all investments, these are not without some dangers. Preferred shares, like bonds, are sensitive to interest rate changes. And like bonds, if the rates rise preferred shares drop in value. If rates fall, the value of one's preferred shares rises.

The National Bank has an excellent online page discussing preferred shares: What they are, how they work, the risks and the rewards.

With interest rates at historic lows, I didn't think it was a good time to put too much of my portfolio in preferred shares. But my portfolio could take advantage of the limited amount of financial resilience offered. I put just more than two percent of my portfolio in CPD.
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The Claymore S&P/TSX CDN Preferred Share ETF seeks to provide investment results corresponding generally to the price and yield performance of the S&P/TSX Preferred Share Index. The ETF provides investors with the opportunity to gain exposure to the Canadian preferred shares market, while providing a diversified portfolio and the potential for quarterly distributions.

Investment type: ETF (Exchange-Traded Fund); listed on the Canadian TSX exchange
Ticker symbol: CPD

Fund manager: Claymore Investments, Inc.