Do Fixed Reset Preferred Shares have a place in this Portfolio?

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Ringer
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Do Fixed Reset Preferred Shares have a place in this Portfolio?

Post by Ringer »

Hello,
I am 66 and my wife 65. We are direct investors. We have a cash trading account (mid six figures); my RRSP (mid six figures); my TFSA (mid five figures); her RRSP (low six figures) and her TFSA (mid five figures). The total of our stock market accounts is approximately $2 million. We have no debts. We also have outside investments (loans and private company shares) in excess of $1 million. Our pension income consists of CPP (combined $1200/m) and OAS (clawed back). Our portfolios are in excess of 95% equities. I would like to begin moving some of the share price increases in our RRSPs into fixed income investments and am thinking preferred shares might be a good vehicle for this. Unfortunately I don't know much about preferred shares. I don't know if they are even listed anywhere. In this regard how would an individual investor even know these things exist? Secondly, I have heard of laddered bonds and I expect it is possible to also have laddered perferred reset shares. Does putting $100k into pererred resets and laddering them over 4 years make sense to you folks as a way to move into fixed income investing? I would like these to be good quality/lower risk investments so does that restrict me to preferred in blue chip companies?
Thanks
Ringer
ockham
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Re: Do Fixed Reset Preferred Shares have a place in this Portfolio?

Post by ockham »

First, welcome to FWF.

Next, I don't know much more about preferreds than you appear to, so I'll make only a couple of comments, and then get out of the way for more learned FWF members.
1. BMO has an ETF which holds a ladder of reset preferreds. It trades under the symbol ZPR. Have a look at it and its performance history. This may (or may not) be a simple and painless solution for your questions. It would save you the labour of studying the details of individual preferred issues. That labour can be intensive (as it appears to me, an outsider).

2. The preferred market is dominated by the same names that dominate blue chip Canadian equity portfolios: big banks, big telcos, big insurers, big pipes. You don't say what your equity holdings are, but if you already have significant exposure to these names, beware that you'll be doubling down on them in the preferred market. This, in fact, is why I've not myself bothered with preferreds. Given the choice between, say, BMO commons and BMO prefs, I'll always pick the commons.

3. Related to #2, there is ongoing debate about whether preferreds are best thought of as fixed income or as equity. My point is not to engage in that debate but only to point out that given your exposure to equity at 95%, moving funds into preferreds may be of limited value as a risk mitigator.
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AltaRed
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Re: Do Fixed Reset Preferred Shares have a place in this Portfolio?

Post by AltaRed »

An additional welcome.... Preferred shares are complicated AND there are various types. To my knowledge, all are traded on the TSX. There is a big thread on Preferreds in the Stocks and Bonds sub-Forum here. It would be a good idea if you at least read the 10-15 most recent pages of that long thread to get a feel for all the variables. The go-to expert on Prefs is James Hymas who posts here now and then and also has a blog that is informative. There is also http://www.prefinfo.com/ for infomation on each of many preferreds on the market (it may not always be up to date with the latest issues).

Some points:

Preferred shares generally issue eligible dividends for the dividend tax credit and thus tax advantaged... and therefore typically better in a taxable account rather than a registered account.

The two primary preferred ETFs that trade on the TSX are ZPR (all fixed resets) and CPD (straight perpetuals and rate resets and maybe other types to mimic the pref index). Fixed resets took a beating for a few years as investors anticipated interest rate increases (to increase the dividend paid upon reset) and that did not materialize. 20116 though was a comeback year.

Preferred shares do not 'mature' (like bonds) but can be called by the issuer on certain dates.

IOW, they are complicated. I would think you would be better off with bonds with laddered maturity dates in your RRSP. No, they do not pay much these days but are not as wild a ride as are preferred shares. FWIW, I don't consider prefs as either equity or fixed income. I sit on the fence with an asset allocation category called 'Other" so that I can readily identify them. I would not have more than 10% of a porftolio in preferreds and probably less.
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