Why you can’t trust the yields on preferred ETFs

John Heinzl was kind enough to quote me in Why you can’t trust the yields on preferred ETFs:

Both CPD and ZPR have also cut their distributions recently. ZPR trimmed its distribution by about 6 per cent in July, and CPD reduced its monthly payout by about 10 per cent in August. That may be just a taste of what’s to come.

“We’ll be seeing more cuts, almost certainly,” preferred share specialist James Hymas, president of Hymas Investment Management, said in an interview. “Any mutual fund with a significant position in fixed resets will be cutting its dividend. You can take that as near a certainty as you ever get in this business.”

If the trailing yields of preferred share ETFs are misleading, what sort of future yields can investors realistically expect? Assuming the five-year Canada bond yield stays well under 1 per cent, Mr. Hymas estimates that CPD’s projected yield is 4.2 per cent. It could be higher or lower than that, depending on what happens to bond yields.

If there’s a silver lining, it’s this: Rate-reset preferreds have been beaten up so badly that they could produce some handsome returns if bond yields start heading back up, Mr. Hymas said. And he believes they will – eventually – given that the five-year yield is now below the inflation rate, meaning that government bond investors are losing money on a real basis.

“It is simply not sustainable for a five-year Canada to trade below inflation forever,” he said. “That simply cannot go on.”

Plenty of bruised preferred share investors are hoping he’s right.

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