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.