- the source for market opinions


October 25, 2017 | The Love Asset

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Over 40% of marriages in this strange country end in tears. Half the couples say it was because of money. That’s a little better than in the States, where 57% of relationship implosions are attributed to sour finances. Yikes. Now with debt at fevered levels and so many people stretching to own houses, this ain’t good.

Can’t tell you how many couples I’ve met who would rather share fluids than their bank accounts and investments. The personal relationship with money is stronger than the bond between people who live together, sharing every moment. What a sad world. A Manulife survey this week says shame and embarrassment over money failure is making more people physically and mentally sick.

“The stigma, shame and embarrassment of being financially unwell often prevents people from taking action to address and overcome these issues. We believe that the (personal counselling) industry as a whole has a bigger role to play in helping remove these stigmas. Only once an individual is comfortable discussing their own money problems, can they begin to take steps to address them.”

Is this you? Shamed, stressed and unwell? Then you’ve come to the right place, pilgrim. Marital fulfillment through a balanced & diversified portfolio. Venus and Mars. Fixed income and growth. Capital preservation and octane.  Income and capital gains.

Today something to please people who want less volatility and a stable return, plus their partners who crave wealth accumulation and cheap taxes. What’s not to get all snuggly and smoochy about?

Of course, the love security referred to is preferred shares. Let’s remind you why these puppies have the ability to make everybody happy, with no shame or whimpers of inadequacy. Also recall that two years ago, when prefs were themselves unwanted and rejected by many investors, this blog suggested happiness would lie in loading up. And, voila, here we are.

Preferred shares are a hybrid between stocks and bonds. Like bonds, they produce a regular distribution (but in dividends, not high-taxed interest) which must be paid to investors before common stock dividends – which is why they’re ‘preferred.’ Safer. Like equities, investors still have an ownership stake in the company issuing them, but a less volatile one. And in Canada the pref market is dominated by blue-chip, stable, regulated companies like the banks, utilities and insurers.

Typically people buy preferreds for the great income, which is double or triple that of bonds and less taxed. Technically they’re equities, but usually held in the safe, fixed income (40%) portion of a balanced portfolio. A good weighting is something close to 20% of your overall amount.

The best way to own preferreds is through an ETF, where you can hold a basket of high-qualify assets. An example would be CPD (just an example – this is not a recommendation), which pays investors a dividend yield of 4.3%, which is twice the return of a GIC and it’s still 100% liquid. But there’s more. This exchange-traded fund has increased in value (besides the dividends paid) by 12.7% in 2017 – which far outstrips the 3.8% return of the TSX in general. Since the beginning of last year (when prefs were sooo cheap) the gain in capital value has been 28%. (CPD also went on sale Wednesday after the latest Bank of Canada report. Sweet.)

This big bump over the last couple of years was predictable. Most preferred shares in Canada (unlike the US) are called ‘rate reset’ which means they actually grow in value as interest rates increase. This is the opposite to bonds, which fall in capital value when rates rise even as the interest they pay augments. We all knew that after the Bank of Canada cut rates twice in 2015 during the oil collapse that they’d later be restored. So as preferred prices fell along with interest rates they became a screaming buy. Hope you listened. And there is more to come as central banks keep tightening in 2018.

Finally, lovebirds, think about something really arousing. The dividend tax credit.

Juicy divvies received via preferreds are grossed up on your tax return, then reduced by federal and provincial credits. The logic is simple – the company paying the dividend to you is doing so out of money it already paid tax on. So, it shouldn’t be hosed again at a high rate.  So someone who has to pay a 25% tax rate on their employment income will face only a 7% rate on the dividends they receive. In fact if you had no other income, you could earn $50,000 this way and pay zero tax.

So, there you have it. Assets that hand over 4.3% to own them, have risen in value by double-digits this year, promise further gains and provide you with a honking big tax break – both on the distributions and any capital gain. Preferreds are more stable than stocks, have a safer income stream and do everything but come with chocolates and a bottle of Cointreau.


STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

October 25th, 2017

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.