Friday, April 1, 2011

Preferred shares for portfolio income and stability: Oh?

This post was updated in mid-September of 2015.
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If you haven't gathered this by now, let me make one feature of my investing philosophy very clear; I make dividend paying investments the bulk 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 fill a demand, a financial need.

When I read the oft-repeated claim that preferred shares add both income and stability to a portfolio, my interest was piqued. I bought into the claim and bought a little CPD. It was a small mistake and only small because I only bought a small amount. Check this screen grab from the WebBroker site taken some years ago (at the time I made my investment).

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

At the time, the Claymore S&P/TSX CDN Preferred Share ETF rated four stars from Morningstar and delivered a very nice dividend. The dividend, paid monthly, wasn't high enough to make the earth move, but I could take pleasure from receiving it ever month. I checked the Performance and Risk screen. I got on board and bought a ticket on the CPD express: a mistake.

Low risk does not mean no risk.

Low risk with an average return: sounded O.K but it wasn't true. Since taking that screen grab, CPD has dropped from $17.38 to $13.59. This is bear market territory. Anyone riding this ETF down to its present value would not say this investment added stability to their portfolio. And a similar screen grab today shows CPD to be rated now as a "high risk investment." The only redeeming change, and it is a small one, has been  the increasing yield percentage resulting from the loss in value. The yield is up a fifth of one percent. This is not enough to compensate for the losses as the value of the ETF dropped through the floor.

I'm sorry I bought the small amount of CPD that I did. I now understand it was the wrong investment for a tax sheltered account. As I am now removing funds from my SDRIF annually, I will be moving CPD to a non-sheltered account to take advantage of the tax advantage enjoyed by the CPD dividend income. I will not move CPD into my TFSA.

I have found a number of posts with good info on preferred shares. Here are some links and I'd click them, read them and learn. -- Cheers!

The impact of rising interest rates

The gentleman writing the above article warns readers that "in their quest for income security, investors have unfortunately been paying a high price that could lead to capital losses . . . "

The role of preferred shares in your portfolio

This a great in-depth take on preferred shares. Note the advice: Only own in non-registered accounts as their largest benefit is their tax-advantaged dividend income. . . . preferred shares are not appropriate for tax-sheltered accounts such as RRSPs or TFSAs.

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