Are preferred shares right for you?

“Derek, should I consider preferred shares for my retirement portfolio?” Investors seeking income often limit their selection to bonds or guaranteed investment certificates (GICs) and give little or no consideration to preferred shares. They usually ignore preferred shares simply because they don’t know much about them.

“Derek, should I consider preferred shares for my retirement portfolio?”

Investors seeking income often limit their selection to bonds or guaranteed investment certificates (GICs) and give little or no consideration to preferred shares. They usually ignore preferred shares simply because they don’t know much about them.

Perhaps the easiest way to think of preferred shares is that they are shares of a company which behave like a bond. A preferred share represents an ownership interest in a corporation, just as common stock does. But it also produces a reliable stream of income — in the form of a pre-set dividend — very much like the interest paid on a bond or a GIC.

Just like a bond, the price of a preferred share will change with movements in interest rates. Typically, a change in interest rates tends to have more impact on the price of a preferred share than changes in the stock market.

Unlike GICs and bonds, the dividend payment from a preferred share can be more tax efficient.

That is if everything else is equal, when comparing returns a preferred share paying the same rate as a bond should provide a higher after-tax payment. This makes them attractive in a non-registered account.

Preferreds are well-suited to relatively conservative investors.

They are also useful for more aggressive investors who want to balance a portfolio heavily weighted towards growth stocks.

Part of what make preferred shares appealing includes the high yield, or dividend.

Preferred shares typically yield more in dividends than common stock issued by the same company. Since dividends are paid quarterly, many investors purchase three or more preferred issues with different payment dates to assure themselves a monthly dividend cheque.

Unlike a GIC, preferred issues are listed on the major stock exchanges, making them easy to buy and sell. Most preferred shares are issued at par values of $25, putting them well within the reach of individual investors. Older issues trade above or below their par value depending on interest rates and other market conditions.

Preferred shares rank senior to common shares — that is, preferred shareholders’ claims for dividends and corporate assets (in the event the company is liquidated) come before common shareholders’ claims.

If a company runs into serious financial problems, the board of directors may vote to reduce or skip the preferred dividend without placing the company in default. But most preferred stock is “cumulative,” so missed dividends accumulate and must be paid to preferred shareholders before any dividends are paid to common shareholders.

Keep in mind that preferred stock is junior to all the company’s debt, so in the same example, bond holders would get paid first.

There are numerous features that may be included in a preferred share. For example, some preferred shares are designed so that their dividend payment will change, or reset, every five years depending on the rate on a Bank of Canada five-year bond.

If the rate is lower than the original, your new dividend payment will be lower for the next five years. In many cases, this rate may still be higher than your typical GIC or bond.

Adding to this, a recent decline in the price of many preferred shares has to do with the decline in interest rates from the Bank of Canada.

Some preferred shares will likely reset at a lower dividend rate in the coming year and the shares are being priced accordingly.

The reality is your investment may appear lower on your statement, but you will continue to get a dividend that is likely higher than the best possible GIC rate.

In some cases there may be some attractive investment opportunities.

If you’ve noticed these changes in your portfolio it is best to review your holdings and understand your strategy moving forward.

Since preferred shares are unique and unfamiliar to most investors it is best to discuss them further with a qualified advisor before deciding if they are right for you.

Wealth Watch is written by Derek Fuchs, a wealth advisor with ScotiaMcLeod in Red Deer. It is provided for informational purposes only and any opinions contained in it are his own. Readers are urged to consult a wealth advisor for help with their personal investment circumstances. Fuchs can be contacted at

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Only 13 new COVID-19 cases confirmed by Alberta gov’t Saturday

There’s currently only two active cases in province’s central zone

Food Truck Fridays to start new Drive and Dash events next week

Events will be held in Westerner Park parking lot Thursday evenings, Friday afternoons all June

Alberta gov’t to expand mental health supports

The Government of Alberta says a $21.6-million investment will expand online resources… Continue reading

City of Red Deer encouraged residents to participate in Food Bank Ninja Challenge

The City of Red Deer is encouraging residents to participate in a… Continue reading

READER VIDEO: American White Pelicans spotted in Red Deer River

A Red Deer Advocate reader spotted a group of American White Pelicans… Continue reading

Protesters rally in Toronto against anti-black, Indigenous racism

TORONTO — Thousands of people are taking part in a rally on… Continue reading

Another COVID-19 case reported in northern New Brunswick on Saturday

CAMPBELLTON, N.B. — People from a city in northern New Brunswick lined… Continue reading

B.C. sees second day in a row with no COVID-19 deaths as schools ready to reopen

VICTORIA — British Columbia announced no new deaths from COVID-19 for the… Continue reading

UN sets pandemic voting rules for Canada’s Security Council campaign

OTTAWA — The United Nations has confirmed that the election for non-permanent… Continue reading

Police watchdog investigating death of Richmond man

RICHMOND, B.C. — British Columbia’s police watchdog has been called in to… Continue reading

COVID-19 cancelled their wedding plans, so they married on a B.C. mountaintop

Ceremony was live streamed to friends and family around the world

Tooting the importance of whistling

OK, so someone who tattles on another person is a whistleblower, and… Continue reading

Police see increase in speedy drivers on quieter streets during pandemic

Police across the country say they’ve been dealing with more complaints about loud, fast vehicles

Most Read