Ellen Roseman of the Toronto Star on Preferred Shares

Ellen Roseman, who writes the “Money 911” column for the Toronto Star, devoted a piece to preferred shares today: Preferred Shares are Ideal for the Risk-Averse

It’s a good introduction – considering she only had 600-words! I was interviewed and mentioned in the article:

So, why invest in preferred shares? I asked James Hymas of Hymas Investment Management Inc. in Toronto, who runs a fund for high-net-worth investors, publishes a newsletter about preferred shares and has a website, www.prefblog.com.

“The common share investor is taking the first loss,” he says. “Common shares provide a higher expected long-term return, but it could be a bumpier flight.”

He points to U.S. banks, hit hard by the credit crunch. News reports indicate that up to half of them may be cutting their dividends this year.

Preferred shares have a somewhat more secure dividend than common shares. Moreover, they trade in a tight price range, generally with no big gains or losses.

Suppose you have $10,000 or more to invest in preferred shares. Hymas recommends buying at least three issues with a top-quality credit rating, such as Pfd-1 from Dominion Bond Rating Service.

“If you can afford five to six issues, you can get a Pfd-2. And with 10 different issues, I wouldn’t mind too much if one was Pfd-3.”

You don’t have much choice when it comes to sectors. A large proportion of preferred shares are from banks and insurance companies.

“With Canadian preferred shares, you have to resign yourself to a high exposure to financials,” he says. “You can make allowances for that in the rest of your portfolio.”

I discussed US Banks cutting their common dividends in FDIC Releases 1Q08 Report on US Banks.

The column quotes me as saying “If you can afford five to six issues, you can get a Pfd-2” … I shouldn’t have said “a”, I should have said “some”. I have published an article on Portfolio Construction which fleshes out my thoughts on this matter.

It was very kind of Ms. Roseman to mention my product offerings! The fund mentioned is Malachite Aggressive Preferred Fund and the newsletter is PrefLetter.

Update: The column has attracted some comment on Financial Webring Forum, where in response to a question about the ‘irritant of issuer calls’ I posted the following:

There’s some data in my article A Call, too, Harms – but note that data for that article reflect a period when, after a long period of declining long term rates, most perpetuals were trading above par … something that is not currently the case.

Many investors – some of them professional – buy preferreds on the basis of current yield, ignoring potential calls. This is not a strategy I recommend to my friends. I’ve summarized data on potential calls at prefInfo.com.

In times where call-dates become important, they cannot be escaped by buying a passive fund, as I point out in my article Closed End Preferred Funds: Effects of Calls

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