The Toronto Star published an article today on preferreds, pointing out:
Banks’ preferred shares at current prices are now yielding close to 6 per cent – much more than one can earn on bank deposits. The tax credit on dividend income makes yield even more attractive.
That extra yield does not come without risk, of course. Prices of preferred shares could fall, as happened in May when there was a sudden rise in long-term interest rates.
There wasn’t really a lot of meat on the bones of this story – but I will admit I’m pleased to see media exposure for the asset class! I have to say, though, that “close to 6 per cent” for banks’ preferreds is a little overly enthusiastic.
I should also point out that comparing the yield on bank prefs to bank deposits is a little fishy – bank deposits are not just senior to prefs, they’re insured; and there’s a certain amount of term extension involved when withrawing deposited money to buy a discounted perpetual! Nitpicking, perhaps, but I always get worried when comparisons of this sort are made … there are many retail investors who will figure that if 20% exposure is good, then 40% must be better and 100% is best of all!
Hat tip: Financial Webring Forum.