POWER POINT PRESENTATION
A 43 page power point presentation on Investing is available as a companion to Ian MacDonald's book
"Income and Wealth
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WITH PREFERRED SHARES
preferred shares by their stock symbols. Their symbol contains a “PR” or a
“PF”. For example, an Enbridge Inc. preferred share is ENB.PR.N.
shares pay dividends, often in the range of 5 or 6 percent. This is usually one
or two percent more than what the the company pays common share holders.
a bond, they are a form of loan, thus they do not share in the capital gain of a
corporation, nor do they have any ownership or voting rights. While they rank ahead of common
shares in realizing money from a company’s liquidation, they rank behind
bondholders. Their ranking is of little benefit. After the lawyers, bankruptcy trustees and the
banks (with their fully secured debentures) are paid off, the chance of
anything being left for distribution is just about nil.
you can conveniently buy and sell preferred shares on the stock market very few
investors have any interest in them. Zero
trades in a day is not unusual. There are 654 shares on the TSX pay paying a dividend
of 3.5%. or more. Of these, 364 are
preferred shares and of these only 112 had more than 4,000 shares traded in a
typical day, despite their high dividends. This is due to the low possibility
of preferred shares delivering an increase in share price to speculators.
shares are issued at a standard price of $25 each. Of the 364 preferred shares
only 17 had a share price exceeding $25
and of these only one was greater than $30.
The chance of realizing a capital gain from a preferred share is 1.91%
and 183 or (50% of them) had lost at least 20% of their value. They were now worth less than $20. Five were
trading for less than $10. It is not
surprising that not one analyst recommended that investors buy any of these 364
further complications discourage stock buyers. If interest rates decrease, the corporation,
who issued the preferred shares, can call them in and issue new preferred
shares paying a lower dividend rate. As well, unlike bonds where you get back all
the money you invested; with a preferred share you only get back what someone
is willing to pay for a preferred share. 98% of the time the price would be
less than the $25 they were issued at.
Finally, if a company runs into financial difficulty, unlike bonds, a
company can suspend paying all dividends, including those for preferred shares.
shares are cheaper than bank loans, without the payment commitments of bonds. While the value of a company’s assets limits
how much a corporation can borrow from a bank, assets do not secure
preferred shares. The number of preferred shares issued seems to be limited by
what the corporation “thinks” they can afford to pay out in dividends.
with their annual stock option incentives tied into a rising common share
price, promote preferred shares because their issue, unlike the issue of new common
shares, does not interfere with their chances to make bonus money.
preferred shares are likely to give you a capital loss, why would you add them
to your portfolio? To guarantee that you do not outlive your savings you need the capital
gain of common shares. I identify many
good ones in my book “Income and Wealth from Self-Directed Investing” that pay
a higher dividend than preferred shares.
Ian Duncan MacDonald
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