Falling interest rates in the early part of 2019 mean investors are going to have to work harder to meet their needs for income.
Suggestion: Take a look at perpetual preferred shares. Perpetuals pay a set dividend and that’s about it. There’s no redemption date in most cases and, unlike rate-reset preferreds, there is no resetting of the dividend every five years to adjust for changes in interest rates.
The price of perpetuals is quite vulnerable to rising rates, which means they’re way out of favour in a world where investors expect rates to climb. But if you’re among the many who think the risk of substantially higher rates is gone, then perpetuals are worth a look.
John Nagel, managing director of preferred shares at Leede Jones Gable, has assembled a list of perpetual preferred shares from blue chip companies that yield an impressive 5.6 per cent or more.
“If you think rates are going to stay the same or go down, why not pick the ones with the highest yields?” he said.
By issuer, the stock symbols for these shares are as follows:
- Canadian Utilities: CU-PR-H
- E-L Financial: ELF-PR-F; ELF-PR-H
- Emera: EMA-PR-E
- Enbridge: ENB-PR-A
- George Weston: WN-PR-A; WN-PR-C; WN-PR-D
- Great-West Lifeco: GWO-PR-F; GWO-PR-G; GWO-PR-L; GWO-PR-M
- IGM Financial: IGM-PR-B
- Power Corp.: POW-PR-B; POW-PR-C; POW-PR-D; POW-PR-G
- Power Financial: PWF-PR-E; PWF-PR-F; PWF-PR-G; PWF-PR-H; PWF-PR-I; PWF-PR-K; PWF-PR-L; PWF-PR-O; PWF-PR-Z
- Westcoast Energy: W-PR-H; W-PR-J
If you research these stocks on Globeinvestor.com, you’ll find that the current yield ranges from 5.6 per cent to 5.9 per cent. Most of these shares have rebounded after being hit hard late last year when concern about rising rates peaked. But most are still below levels of a year ago and trade below their par value of $25 (that’s what you’d get if they were redeemed).
Perpetuals don’t get talked about much these days because rate resets dominate the preferred share world. Mr. Nagel said perpetuals account for just 19 per cent of the preferred share universe he follows. Rate resets are the more comfortable way to invest in preferred shares in a rising rate market, but they have a tendency to fall hard in price when rates fall.
Perpetuals have a nasty side of their own and we’ll see it if the economic outlook firms and interest rates start to chug higher – expect significant price declines. But if rates remain the same or decline, perpetuals are in their element.
Rob Carrick