8 Responses to “January 31, 2020”

1. Szeven says:

   February 1, 2020 at 8:20 pm

   Weeks like this make you wonder if rates only go down in this economic system and are simply destined for negative

2. Tim says:

   February 2, 2020 at 9:27 pm

   It is discouraging as a preferred share investor when this asset class continues to under-perform bonds for such a long period, despite its substantially higher coupon rate and the general expectation that a higher risk investment return more than a lower risk one over long periods of time.

   As of Dec. 31, 2019, here’s the ten year annualized total return for the broad indexes for each asset class:

   FTSE Canada Universe Bond Index 4.31% per year
   S&P/TSX Preferred Share Index 2.10% per year

   And the 5 Year Canada rate really hasn’t changed all that much over that period:

   Dec. 2009: 2.74%
   Period Monthly Average: 1.58%
   Dec. 2019: 1.64%

   Ten years!

   I’m clipping my coupons and reinvesting dividends but total return matters a whole lot when you eventually sell.

   Here’s hoping for some reversion to the mean in the future. Preferreds have a lot of catching up to do just to match bond returns, let alone return a risk premium over bonds.

3. jiHymas says:

   February 4, 2020 at 7:11 pm

   make you wonder if rates only go down in this economic system and are simply destined for negative

   I’m pretty dubious about negative yields in Canada; so far the Fed and the BoC have managed to maintain inflation well above zero – not always the case in Europe. I’ve heard many arguments based on demographics – ‘It’s Japan! It’s Japan all over again!’ – but Canada is cranking up immigration for precisely that reason.

   In the long-term, I suspect that after I’m dead there will be huge amounts of capital destruction wrought by Climate Change, which will force yields upwards; in the not-quite-so-long-term, there may be market effects based on anticipation of that.

   It is discouraging as a preferred share investor when this asset class continues to under-perform bonds for such a long period

   Yes, indeed! In fact, as reported in the post MAPF Performance : August, 2019, the end of August marked a 7-year-and-4-month period with a negative total return; comparable in effect with the Credit Crunch but without any such satisfactory explanation based on general economic conditions.

   I’m clipping my coupons and reinvesting dividends but total return matters a whole lot when you eventually sell.

   All you can do is continue the clipping. I’m not stressed about the present value of my little retirement fund, any more than I would be if I had an annuity.

4. Tim says:

   February 5, 2020 at 8:04 am

   Hi James, thanks for the response.

   >I’m not stressed about the present value of my little retirement fund, any more than I would be if I had an annuity.

   Hmm, interesting comparison. Is the idea that you buy sufficient preferred shares to provide a desired amount of ongoing retirement income via dividends and then ignore the cost basis, as you would with an annuity?

   Given that one cannot expect much capital appreciation in preferred shares, one would need to be very certain of the long-term stability of the dividends.

   This would also likely lead to a high overall asset allocation to the preferred share sector.

   If this works out, one has the win of still owning the base capital asset (vs. an annuity) and can keep it with the estate at whatever value it happens to have at time of death.

5. stusclues says:

   February 5, 2020 at 12:58 pm

   Is the idea that you buy sufficient preferred shares to provide a desired amount of ongoing retirement income via dividends and then ignore the cost basis, as you would with an annuity?

   If the ongoing retirement income is sufficient to cover your lifestyle costs, then you have the “ability” to hold. If you have the “willingness” to hold, you can construct your own portfolio valuation methodologies rather than just marking to market every few minutes.

6. baffled says:

   February 5, 2020 at 2:44 pm

   hello tim , i know (because i did it ) you are correct in thinking you can set up your own income , instead of an annuity , but i think , that since as you say “one cannot expect much capital appreciation in preferred shares,” you need some good common share div payers for growth . along with the pref shares . you also need at least 6 months of living expenses (better would be 1 year ) in short term gics , so you are not faced with having to sell a stock when you dont want to . if you are young and are working , it wont happen over night , but it can happen

7. mbarbon says:

   February 5, 2020 at 4:21 pm

   Split share preferreds may offer some asset stability, but there is a slight cost to it.

8. jiHymas says:

   February 6, 2020 at 1:21 am

   Is the idea that you buy sufficient preferred shares to provide a desired amount of ongoing retirement income via dividends and then ignore the cost basis, as you would with an annuity?

   Well, I’m certainly not going to recommend a portfolio comprised entirely of preferred shares, but they do have their place, especially when the spreads are so high.

   Ideally, retired investors should minimize draws on capital. A steady withdrawal of capital not only depletes the nest-egg, but it exposes the investor to sequence of returns risk (in that capital withdrawn in year 1, when returns are -10%, cannot participate in the next year’s +20%, leading to underperformance even though the annualized market return is exactly what you thought it would be).

   Annuities are an underrated investment. Yes, there is a big hit to capital when they are bought and yes, long-term corporate yields are low and therefore annuity rates are relatively low. But they retain their salient features: they pay for as long as you are alive and you get the mortality credits (the extra pay-out you get because some people die early). Recently introduced deferred annuities are also a great thing to consider.

   Their weakness is, of course, that you lose control of the capital. At best, this deprives you of flexibility if something unexpected happens and at worst you die on your way home from handing over the cheque. So for those who are in the twilight zone between having to annuitize every spare penny and being able to live off common share investment income, preferred shares come to mind as a way of receiving enhanced income while retaining control of capital.

   FixedResets will give you a degree of inflation protection, at the cost of exposing you to periods, such as now, when real govenment bond rates are negative. Straights give you constant nominal income, but expose you to inflation risk. As always, the more money you have the better you can cover off the various risks.

   Right now a 65-year-old man can get a payout rate of about 6.1% on a no-guarantee annuity. A top-rated PerpetualDiscount, such as CU.PR.G, pays about 5.25% – as a dividend – while allowing you to control (and bequeath) your capital.

   It gets more complicated once you get into it, of course. You have to consider tax, the effect on OAS, call risk of the preferred and the all-important credit risk, but I’m sure you get the idea. Preferreds are a viable alternative for security of income, as long a you recognize in advance that you’re getting this at the expense of security of principal.

   If the ongoing retirement income is sufficient to cover your lifestyle costs, then you have the “ability” to hold. If you have the “willingness” to hold, you can construct your own portfolio valuation methodologies

   Yes. There’s a good article on this concept linked on the post The Value of Liquidity.

   you need some good common share div payers for growth . along with the pref shares . you also need at least 6 months of living expenses (better would be 1 year ) in short term gics , so you are not faced with having to sell a stock when you dont want to .

   Yes. In formulating a retirement financial plan you have to think of all the risks you face and cover them off as best you can with the available capital.