Think preferred dividends are safe? Not these ones

John Heinzl of the Globe and Mail was kind enough to quote me extensively in his latest piece, Think preferred dividends are safe? Not these ones:

Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

Some of these dividend cuts will be “absolutely massive,” said preferred share expert James Hymas, president of Hymas Investment Management in Toronto.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.

Here’s a chart that I published in the March edition of PrefLetter, showing the expected change in dividends, given a constant GOC-5 rate of 0.84%, as related to each issue’s next Exchange Date:

Click for Big

Update, 2015-05-03: There was a steep decline in FixedResets at the beginning of April, 2015. One commenter attributed at least part of the descent to this article.

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