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Preferred shares to become common?

Robert Arber
0 Comments| October 15, 2008


The notion of investing in preferred stock shares is catching hold with investors these days. One need only observer the moves made by investor Warren Buffett recently, who took stakes in Goldman Sachs (NYSE: GS, Stock Forum) and General Electric (NYSE: GE, Stock Forum) via the purchase of preferred shares. Some have observed that preferred shares are a great alternative – perhaps a superior alternative – to dividend-paying common shares. 

Here is how Investopedia.com defines preferred shares: “A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.” 

There are, of course, many specific details and covenants associated with the issuance of preferred stock, and every corporation that issues them will structure their securities differently. For example, you might have straight preferreds, retractable preferreds, floating rate preferreds or fixed floater preferreds. 

The question for investors in these times (unless they’re Warren Buffett, that is), is how does one purchase preferred stock? How does one find out which companies issue them, and what the specifics are? 

I have begun to do some of my own research using Stockcharts.com, by searching the site for all issues that have the word “preferred” in them. Below are brief overviews of three tradable issues I discovered that can be bought and sold the same as a stock, two from the Toronto Stock Exchange and one from the NYSE: 

Diversified Preferred Share Trust (T.DPS.UN, Stock Forum)

From the Sentry Select website, the description of DPS is as follows: “Diversified Preferred Share Trust is a passively managed, closed-end investment trust designed to provide quarterly, tax efficient distributions. The main objective of this Trust is to generate quarterly, tax efficient cash distributions by investing in an equally weighted, diversified portfolio of preferred shares and preferred securities of Canadian issuers. The portfolio is managed on a passive basis to provide investors a low management fee.” 

Some of the issues that DPS holds are Royal Bank of Canada Non-Cumulative 1st Preferred Series N, Great-West Lifeco Inc. Non-Cumulative 1st Preferred Series F, Fortis Inc. Cumulative Redeemable 1st Preferred Series E Convertible, and Manulife Financial Corp. 4.10% Non-Cumulative Class A Preferred Series 1. 

Because DPS is a closed-end fund, it trades around a net asset value related to the performance of the issues it holds. DPS is currently trading at $17.20, down from around $20.00 in August and September. With an annual dividend of $1.20, DPS is now achieving a yield of 6.9%. 

Flaherty & Crumrine Investment Grade Preferred Fund (TSX: T.FAC.UN, Stock Forum)

From the website for Brompton Group, which recently merged with Flaherty & Crumrine: “Diversified portfolio of investment grade preferred securities actively managed by Flaherty & Crumrine Incorporated, one the oldest and most experienced U.S. firms specializing in preferred securities. Attractive current yield of 6.4% per annum, based on original cost of $25 per unit, paid monthly. ‘Safety Net’ hedge to mitigate the impact of significant increases in long-term interest rates on the net asset value of the portfolio while permitting the portfolio to appreciate when interest rates decline.” 

FAC (very thinly traded) is at $8.00 today, which now gives it a whopping yield of nearly 19%. That is based on an annual dividend payment of $1.50 and a unit price of $8.00, well below the $25.00 par value that the $1.50 dividend is based on. 

Here is the breakdown of FAC holdings: 

PowerShares Financial Preferred Portfolio (AMEX: PGF, Stock Forum)

Trust PowerShares to offer a preferred share ETF. Their offering is: “based on the Wachovia Hybrid & Preferred Securities Financial Index (WHPSsm Financial Index). The Index tracks the performance of U.S. listed preferred stocks of preferred stocks issued in the US market by financial institutions and currently includes approximately 30 securities selected by Wachovia pursuant to a proprietary selection methodology. The market-cap weighted Index is rebalanced monthly.” 

This fund holds preferred stock issued by many of the banks that have been toplining news stories lately: Bank of America (NYSE: BAC, Stock Forum), Merrill Lynch (NYSE: MER, Stock Forum), Citigroup (NYSE: C, Stock Forum) and JP Morgan Chase (NYSE: JPM, Stock Forum). The PowerShares web page for PGF states that the dividend yield is in the neighborhood of 11%; units are currently trading at $13.53.

Know anything about preferred share investment opportunities you can share with Stockhouse members? Comment below.


Tags: BANKS - REGIONAL - US BANKS - GLOBAL CAPITAL MARKETS ETF

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