Investors seeking a retirement income stream often limit their selection to bonds or GICs and give little or no consideration to preferred shares. Many people ignore “preferreds” simply because they don't know much about them.
Preferred shares are an excellent, high-yield investment category. In theory, preferred shares represent ownership interest in a corporation, similar to a common stock. In practice, preferred shares act similarly to bonds, producing a reliable stream of income in the form of pre-set dividends. One major advantage of investing in preferred shares versus bonds or GICs is the dividend tax credit, which leaves more money in your pocket after taxes are paid.
Remember that preferred shareholders do also have a claim on the assets of the company (behind bondholders) in case of a default. The credit rating of a preferred share is an important element of the investment decision. However, while investors have often overlooked preferred shares, they can be an excellent way to enhance the income on their portfolio while managing the risk-return trade-off. Since dividends are paid quarterly, many investors purchase three or more preferred issues with different payment dates to assure themselves a monthly dividend cheque.
Many 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.
Greg Holohan is an Investment Executive with ScotiaMcLeod, who specializes in providing unique investment, insurance and retirement strategies to families in the Markham-Stouffville area. Greg can be reached at 905.479.8238 or greg_holohan@scotiamcleod.com ScotiaMcLeod is a division of Scotia Capital Inc., member CIPF. This article is for information purposes only and should not be considered as personal investment, tax or pension advice. |
