This is a column from regular contributor Clark.
The previous part of the series looked at some factors to consider during preferred stock research and taxes on preferred dividends. This final part will look at the ways to buy them (how to buy stocks).
To know if a company has outstanding preferred shares, one can get the latest annual report (or just the financial statements section, if available) from its website and look under Shareholders’ Equity. There should be a line about preferred shares if they have been issued. If there are outstanding issues, then the potential investor can read the company’s prospectus for all the information regarding their preferred stock. Generally, many banks issue preferred stock as a source of Tier 1 capital.
If you’d prefer a consolidated resource, then check out the Quantum Online website. It is a good tool for income investors – not just preferred stock buyers. They do require registration (free) to access their tables and list of securities. To benefit investors, ScotiaMcLeod offers a handy guide (pdf) for different types of preferred shares with ratings from credit agencies, rating changes, share prices, dividend amounts, redemption details, retraction information, etc. Another useful resource for Canadian preferred shares is the Pref Info website offered by Hymas Investment Management.
Malachite Aggressive Preferred Fund is an actively-managed fund that is offered only to accredited investors. For an individual investor to be accredited (refer to the link above for other ways to be accredited),
- He/she must own financial assets with a net realizable value of over $1 million (alone or household) OR
- Have net income (before taxes) over $200K in each of the two previous years or $300K when combined with spouse and expect the earnings to continue in the coming years OR
- Must invest at least $150K in the fund.
The annual portfolio management fees are 1.00% on the first $500K, 0.75% on the next $500K and 0.50% on the balance.
Diversified Preferred Share Trust is a passively-managed, closed-end fund that trades on the TSX under the symbol DPS.UN. According to the product information page, the fund invests in an equally-weighted portfolio of preferred securities of Canadian issuers and generates quarterly, tax-efficient distributions. It should be noted that a certain percentage of the distribution may be in the form of Return of Capital rather than eligible dividends. The fund has an MER of 0.70%.
There are other funds like the (all actively-managed) JOV Leon Frazer Preferred Equity Fund that generates dividend income by investing primarily in preferred shares of Canadian companies at an MER of 1.40%, Omega Preferred Equity Fund with an MER of 1.25%, and Manulife Preferred Income Fund with an MER of 2.37% that may be of interest. Preferred Share Investment Trust (PSF.UN) is another actively-managed closed-end fund with a management fee of 2.10%.
Claymore seems to be the only player in the Canadian market that offers an ETF for preferred Canadian equities. The Claymore S&P/TSX CDN Preferred Share ETF (TSX: CPD) tracks the S&P/TSX Preferred Share Index at a management fee of 0.45%.
Hopefully, this five-part series on preferred stocks would have clarified their distinctions in relation to common stocks and bonds and put forth some points to consider for those delving into them. The vital component in an investor’s research process for an individual preferred stock should be the prospectus, which would be available online. Other resources like the credit rating agencies and websites will aid the analysis but the most valuable information about the stock would come from the horse’s mouth, i.e., the company!
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.