SQRT wrote:Thegipper wrote:I have given some thought to the NVCC provisions. If I understand it correctly the regulator can force a conversion to common shares if the bank has serious capital shortfalls. Although this may be possible I think the risk is remote. I bought a chunk of RY.PR.Q. I get a 5.4% yield until 2021 and on the reset I should get a 5% plus yield. Even if the government yield is zero on the reset date I still get 4.75%. The daily trading volume is much larger on this preferred share then on other preferred shares. It is much more liquid stock.SQRT wrote:I agree with you except the common is yielding almost as much. Why not try to participate in the upside? The prefs really are not as risk free as they might seem given the NVCC structure. I don't view the chances of a common div cut as being significant, but if they had to cut the common divs the prefs would very likely trade down as well given the NVCC provisions. So on a risk adjusted basis, I see the common as a better bet.
I don't dispute your logic. But when RY common yields 4.4% and the div grows every year (probably5-8% per year) it just seems like a better bet to me. Prefs are not FI especially with the NVCC which ties them more closely to the common results on the downside.
I understand the logic of holding the common shares. Here is my take. We will have a long period of low interest rates, low inflation and very low growth. Canadian banks will have trouble growing in that environment and if correct the common shares will be under pressure. The NVCC preferred shares should trade close to the $25 dollar price and be paying close to 5.5% . I expect they will behave more like a fixed income asset then a common share. Mr Market will have the final say.