Video - Preferred Shares
In this clip, our expert Anne Perreault discusses preferred shares. She defines this class of shares and explains the earnings they can provide, the various types available and more.
SUBJECT : Preferred Shares
EXPERT : Anne Perreault
VERSION : English
Note: The information in brackets "[...]" describes the visual and audio content of the video other than the dialogue or the narration.
[Elegant music begins. Different parts of Desjardins Securities' head office appear on screen including, primarily, the prestigious trading floor where many employees work. These images give way to a shot of the firm's logo and the dsia.ca website. This shot gives way to Mrs Anne Perreault, whom we see appearing on a balcony overlooking the trading floor where employees are busy working].
Anne Perreault (M. Sc. Finance, CFA, Portfolio Manager - Prefered Shares - Brokerage and Private Management Division)
My name is Anne Perreault. I'm a portfolio manager with the Desjardins Securities brokerage and private management division. Today I’m pleased to present this Finance Matters clip. The topic is preferred shares. I've been in this finance industry for over ten years, and with Desjardins Group nine years.. I specialize in Canadian equities, specifically in preferred shares.
Let me start by defining what a preferred share is.
A preferred share is a hybrid security ? a cross between a bond and a company's common share. As a result, the value of a preferred share will fluctuate with interest rates ? in other words, its price will increase when interest rates go down and decrease when interest rates go up, just like a bond ? but it will also fluctuate with the company's financial situation as a common share does. However, returns from preferred shares aren't as volatile as those from common shares.
Preferred shares offer you predictable income in the form of a dividend that's distributed on a quarterly basis. Dividend income has definite tax advantages over interest income. For example, a person living in Quebec and taxed at the maximum tax rate would have to earn approximately 6.6% in interest income to achieve the same after-tax return when comparing to a 5% dividend income. That's a substantial difference in our current low-interest rate environment .
There are different types of preferred shares and each type has its own characteristics. For example, some preferred shares provide a dividend that fluctuates with interest rates; others have a dividend rate that is reset every five years or provide a fixed dividend. This diversity is very helpful to build a portfolio strategy. As a preferred share portfolio manager, I start by selecting quality securities with a high credit rating. I then diversify by type of preferred shares, based on whether I believe these to be undervalued or overvalued. Next, I compare the relative value of the issuers. An issuer with a riskier financial situation will provide the investor with a higher yield as the perceived risk is higher. For example, in the insurance sector, I look at whether the higher yield generated by Manulife securities compared to Great-West Life securities is enough to cover the extra risk taken. Finally, I analyze the monetary policies and economic conditions such as inflation to forecast the direction of the interest rates.
Now, how do preferred shares fit into a diversified portfolio? Preferred shares can be used to complement the fixed-income portion of your portfolio and enhance your after-tax return. But before you decide how much of your portfolio to invest in each asset class, it's important to take a look at your investment objectives and your risk tolerance.
[The music begins again. The dsia.ca website address appears in the middle of the screen and the following text appears at the bottom of the screen « Desjardins Wealth Management Securities is a trade name used by Desjardins Securities Inc. Desjardins Securities Inc. is a member of the Investment Industry Regulatory Organization of Canada ( IIROC ) and the Canadian Investor Protection Fund (CIPF). ». These images end with the Desjardins Securities logo. ]