Why I Prefer to Avoid Preferred Shares

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Why I Prefer to Avoid Preferred Shares | Common Sense Investing

Рет қаралды 54,492

Күн бұрын

In the first video in this series, I told you why high-yield bonds fall short on a risk-adjusted basis, and should only be included in your portfolio in small amounts through a well-diversified low-cost ETF, if at all. If you haven’t watched it yet, click here: • Why You Should Think T...
In this episode of common sense investing I will tell you why I prefer to avoid preferred shares.
My name is Ben Felix of PWL Capital and this is Common Sense Investing. I’ll be talking about a lot more common sense investing topics in this series, so follow me here on KZfaq or on LinkedIN. I want these videos to help you to make smarter investment decisions, so feel free to send me any topics that you would like me to cover.
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Пікірлер: 82

@myrle-v4g Ай бұрын

As an lnvesting enthusiast, I often wonder how top level investors are able to become millionaires off investing. . I’ve been sitting on over $545K equity from a home sale and I’m not sure where to go from here, is it a good time to buy into stocks or do I wait for another opportunity?

@shizue-w7n Ай бұрын

I think the safest strategy is to diversify investments. Like spreading investments across different asset classes, like bonds, real estate, and international stocks, they can reduce the impact of a market meltdown.

@thuylamson-z7t Ай бұрын

A lot of folks downplay the role of advlsors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve notwithstanding inflation, from $275k to $850k.

@mertie-l2f Ай бұрын

This is definitely considerable! think you could suggest any professional/advisors i can get on the phone with? I'm in dire need of proper portfolio allocation.

@thuylamson-z7t Ай бұрын

Angela Lynn Schilling is her name. She is regarded as a genius in her area and works for Empower Financial Services. She’s quite known in her field, look-her up.

@mertie-l2f Ай бұрын

Thank you for the lead. I searched her up, and I have sent her a message. I hope she gets back to me soon.

@stevenobinator2229 Жыл бұрын

There is enormous capital appreciation also. During the COVID crisis I put 120k into preferred shares, went up 100%

@stevenobinator2229 4 жыл бұрын

You're right about most preferred shares. But some perpetuals are fantastic when that devalue during shocks, such as Enbridge class A. Enbridge isnt going anywhere any time soon. AND also common share holders lose their dividend before Preferreds. BUT you are right preferreds are very complicated, and the call feature is annoying, but you can make appreciation off the callback.

@samsonsoturian6013 Жыл бұрын

Ultimately you're looking at something halfway between shares and bonds and the returns will reflect that. Rich chumps like to invent new and exotic securities as if that will somehow make both parties richer.

@LisaCulton 4 жыл бұрын

Not gonna lie, I love Preferred shares.

@rahulparikh6183 3 жыл бұрын

Same PFF... just sit there and get paid

@LisaCulton 3 жыл бұрын

@@rahulparikh6183 Works every time!

@lindabutt1481 2 жыл бұрын

I LOL with this comment.

@LisaCulton 2 жыл бұрын

@@lindabutt1481 It's good stuff!

@hl3641 Жыл бұрын

What’s ur average annual return track record of preferred portfolio for past decade?

@rtashpulatov 6 жыл бұрын

Everything what you say here is absolutely correct and makes sense. Thank you, Rustam

@BenFelixCSI 6 жыл бұрын

Thank you.

@klaythompson663 4 жыл бұрын

What if there is a set redeem rate if the issuer recalls the shares (eg. $25), but you can buy the preferred shares for less right now (like $10-15)?

@dmehus 6 жыл бұрын

Very true, every time I think of buying a preferred share in a company because it's trading at a significant discount to its par value/call price, I just remind myself that the company is never, err.. perhaps I should say very rarely, for compliance reasons, under any obligation to call/redeem its preferred shares. If I were going to invest in a small amount of preferred shares, I think 5% of one's overall portfolio probably makes sense (I'd go 10% as the upper end of the range, though, not 15%), I'd probably just go with Horizons' Active Preferred Share ETF (HPR). Also, your point that a company often issues preferred shares when it needs capital and is over-levered is a good one. I should apply the similar discipline to the above by avoiding companies like Element Financial, which may be attractively valued on a P/E basis, not so when looking at its balance sheet, and simply avoid it entirely* (*well, to the extent possible, it's going to exist in a very, very small way in a passive index fund). Cheers, Doug

@BenFelixCSI 6 жыл бұрын

Thanks for another thoughtful comment. Why would you choose HPR?

@dmehus 6 жыл бұрын

I guess, only because the Horizons managers, which essentially outsources most of the management to Fiera Capital, have shown themselves to be good managers over the medium-term. I realize this would go against a truly passive investment philosophy and investment portfolio, but I'm just not sure that building a passive index around preferred shares really makes a lot of sense (i.e., preferred share index funds/ETFs forced to buy a basket of preferred shares at designated times). I guess, in theory, it probably shouldn't matter; I just don't know if there's the same level of really long-term academic research in preferred share index fund returns that there is over, say, the S&P 500 index or S&P TSX Composite index? If some really good research in this area does exist, I'd love to take a look at it. That being said, I love the idea behind preferred shares and they definitely have their advantages from a tax standpoint, but people need to realize that, like you said, they're essentially taking near equity risk for bond-like returns. I guess...upon reflection, if I were really actually going to buy any preferred shares, I'd probably buy a Canadian credit union's "preferred-like" shares. I call them "preferred-like" because while they're similar to a company's preferred shares, the dividends from them are treated as regular interest income. They don't have the liquidity that some publicly-traded preferred shares have, can be difficult to redeem (i.e., limited to the amount you may redeem each year and subject to credit union board approval), but they do (usually) have a fixed redemption price. Still, the dividends are usually non-cumulative which, as I understand it, is just a fancy way of saying, "any time we opt not to declare (pay) a dividend, we're not obligated to pay those past undeclared (unpaid) dividends." Speaking of which, possible other good topics: (1) REITs and (2) unsecured debentures, what they are, and why they're more like preferred shares than bonds (and why they're also the preferred shares' "ugly cousin," to the company for sure (but also to the investor/potential investor) because I'm guessing they're treated as 'debt' on its balance sheet). Related question: what are your thoughts on equally weighted ETFs as opposed to traditional market cap weighted ETFs, do you consider that to be "active management"? I understand there's different schools of thought in this area and, if it is (I can see both sides), it seems to be a very, very minor/"low key" form of active management, no? Cheers, Doug

@BenFelixCSI 6 жыл бұрын

You are correct that there is not the same level of evidence for market efficiency in preferred shares. I wouldn't add preferred shares to my portfolio but I can see the argument for active management in that space. I don't care much for equal weighting, but weighting based on factors is sensible to me. That is, increasing weights based on certain characteristics of stocks like size (small stocks) and relative price (value stocks). Stocks with those characteristics tend to have better long-term performance so over-weighting them makes sense. It does blur the lines between active and passive a bit, but even with market cap weights someone had to decide what goes in the index. Based on that there is no true passive.

@dmehus 6 жыл бұрын

Thanks again for taking the time to reply, Ben. Always appreciate your thoughts re: preferred shares and whether equal weighting constitutes "active management". It sounds like you would not take that somewhat ultra-conservative view that it constitutes "active management". It also sounds like that you DO use, at least occasionally, certain single factor "smart beta" ETFs. I think that's definitely a degree of "active management," but I agree that it's relatively minor in comparison to someone actively picking certain individual stocks based on certain characteristics. Would it be fair to say that you DON'T like certain pre-built multi-factor ETFs (i.e., Vanguard Canada has a few of them)? I personally tend to steer away from all "smart beta" ETFs, though if I were to use them, I'd definitely go with a single-factor one. I just can't see how a multi-factor ETF would ever outperform its benchmark. :) Cheers, Doug

@BenFelixCSI 6 жыл бұрын

I use, for myself and my clients, products from Dimensional Fund Advisors. They are multi factor, but nothing crazy. Size, relative price, and profitability. As far as I know they are the only company implementing academic research in a way that makes sense.

@basseon 10 ай бұрын

Such a downer! LOL Brompton just came out with a ETF of fixed reset preferred shares SPLT. The fact that it holds pretty much all the major titles in that sector and that it's actively managed by a management firm known for their conservatism is a good think. For an old retiree, it might be a good diversification in small amount. Right now it gives 6.2% yield and has an MER of 0.5%. I'm not buying any for myself, but I added an very small allocation to my mom's portfolio.

@tuatara80 27 күн бұрын

Ah I see. So far, I have Bank of America preferred shares. Better sell them now before BAC goes bankrupt. Thanks for the advice.

@Unifrog_ 4 жыл бұрын

Buffet has just bought shares in a gold mining company and now I hear my friends are getting interested in gold miners and gold miner funds. Any plans for a video on mining sector funds?

@alr9967 8 ай бұрын

December 2023. In the summer and fall I picked up preferreds yielding 6-8%. Investment grade rated companies. Now with the Fed pivot I have capital appreciation if I chose to sell or I collect the dividends. Your hatred is misplaced.

@tomspeed3354 Жыл бұрын

companies cannot stop paying dividends at their discretion for their preferred stocks. Unless they do the same for their common first.

@TestEric 3 жыл бұрын

Thanks, I knew those high yields and stable prices would have been more popular if there wasn't serious risks involved. Now I understand why you wouldn't consider them as an investment.

@bills.1390 Жыл бұрын

Really, you do realize Major banks issue them as well as highly rated insurance companies.

@MasterKenfucius 4 жыл бұрын

The level of risk on these is established by the person investing and their selections. You can't just paint them all as risky. You mean to tell me that if Bank of America offers a preferred at 7% you wouldn't take it? Come on now. That's a sure bet in a bear market if interest rates are low. Look at the preferreds today... they're all sky-high in price because the fed keeps cutting interest rates.

@johngonzales 4 жыл бұрын

Hi can I know what do you invest in? do you just invest in common stocks? thanjks

@elmateo77 4 жыл бұрын

Index funds or low cost index etfs.

@jul059 4 жыл бұрын

Can you do a video on p2p lending?

@Uthur 3 жыл бұрын

How about preferred shares hybrid ETFs like PFF

@alehunter15 4 жыл бұрын

Really interesting and thorough analysis!

@alexm5632 3 жыл бұрын

How liquid are preferred shares ETFs, can i combine investing in PFF and covered calls?

@111kalman 2 жыл бұрын

How are high yield bonds an alternative investment?

@sapitron 3 жыл бұрын

so you're saying that trying to generate a passive income from the stock market is not worth it?

@Joe-jc5ol 4 жыл бұрын

I do not recommend the Canadian preferred ETF, I think it would be better to hand pick 4 to 6 different companies preferred to have as a minor (10% to 20% holding) in a portfolio. The etf is too hard to understand, but 4 or 5 issues one can understand, minimum rate resets or perpetual discounts or a rate reset that is priced low enough to act as a good hedge against a potential rise in rates...

@stevenobinator2229 Жыл бұрын

NO, just buy high quality names. The ETF will bleed you over the years, too expensive

@Joe-jc5ol 5 жыл бұрын

Doesn't the rate reset on the Canadian shares substantially decrease the interest rate risk? What if I buy shares that will reset every year (think of the zpr etf or a strategy that yields similar results) also, I like their complexity, the fact that fewer people bother with them makes them attractive in certain opportunities. Consider 5 year rate reset shares trading at around half their call values now. In 5 years and every year thereafter they could reset to double the intended rate from our perspective...At worst these shares help shield us from a situation where interest rates increase a lot and we had bought them in a less favorable environment. And not everyone likes to bother trying to predict the future with common stock :/

@BenFelixCSI 5 жыл бұрын

Yes it does reduce the interest rate sensitivity. Here is an article detailing why there is still enough risk in the asset class to make its place in a portfolio questionable (in my opinion) www.pwlcapital.com/volatility-of-fixed-reset-preferred-shares/

@Joe-jc5ol 5 жыл бұрын

Thanks. I mean sure, buying at par is a bad idea. What about buying the cheap share at its worst possible time when it reset to the 0% yield(plus the small spread)? The cheapness of it guaranties a decent minimum return, it being below par guaranties profits on call, as long as the credit rating of the issuer is solid. Forgive my insistence I find regular stocks too volatile and exciting for me, I am looking for the boring 5% return. Also sorry for the late reply, I was not notified by youtube of your reply for some reason.

@johns4386 2 жыл бұрын

Hey, it's Bartleby the Scrivener!

@curiosoneee 9 ай бұрын

I like em to !

@lastempire7302 2 жыл бұрын

None of the risks you listed out apply to preferred shares in a Split Share Fund that invest in Canadian Dividend Aristocrats. So does it justify to use that as an cash equivalent fix income vehicle? I mean, it would take all the blue chip companies to fail to render the preferred share worthless. Maybe an apocalyptic event can do the trick?

@KrisWustrow 5 жыл бұрын

With all due respect Ben, you are wrong on this. If you read any authors on SeekingAlpha.com, such as Colorado Wealth Management, Brad Thomas, Scott Kennedy, and others, you will see that there is indeed a very successful method for picking and holding preferred shares. If the parent company is stable, then the risk to the principle is minimal. Also, the preferred share price fluctuates generally within a narrow band. Yes, some go down, and some go up. In 2012, as my parents became retirees, they needed to depend more on dividend income. However, their nestegg (Roth IRA/Trad IRA/Rollover IRA accounts) only came up to $180K USD. So, what do you do? Most "Financial Advisors" (I was a series 7 at Merrill Lynch) would sell them a "Safe" Fixed-Index Equity Annuity...the principle is safe but the returns are peanuts. OK, so then what...how about ETFs...say the S&P500 ETF...sure it has gone up, but it doesn't produce quarterly cash in the pocket (which is the goal for non-rich retired folk). OK, so how about some mutual funds? Yeah, they also don't produce cash in hand. And then comes in the star of the show: preferred shares. Nice ones paying 7%-9% yield...my parents have had them for years and NOT ONE has cut or suspended dividends, and only one has been called, at a profit actually. It is painfully obvious watching this video that you don't know what the hell you are talking about. Cheers.

@BenFelixCSI 5 жыл бұрын

Enjoy: www.cbsnews.com/news/why-you-should-avoid-preferred-stocks/

@stevenobinator2229 4 жыл бұрын

@@BenFelixCSI I was a licensed trader and analyst, he is right generally. But like you said in some cases they are fantastic options. It really depends on the company and issue. ALSO from my understanding there are very few Perpetual preferreds in the USA

@stevenobinator2229 4 жыл бұрын

Can you share the preferred shares you bought. I am a canadian investor and only know the canadian market well?????

@ronloftis9080 4 жыл бұрын

@@stevenobinator2229 as far as I know, most preferred issues are perpetual. They do have call dates, but they are not "mandatory" redeemed. Only a handful of preferreds have mandatory redemption dates. OXLC and ECC have mandatory preferreds for example.

@ConsumeristScroffa 2 жыл бұрын

@@BenFelixCSI What does the article you shared prove exactly? It actually compliments his point. The keyword is "it depends".

@bozolito108 5 жыл бұрын

I prefer to avoid sharing my joint as I smoke and watch your informative vids good sir, lest I become distracted by banalities of frivolous non financial discussions

@BenFelixCSI 5 жыл бұрын

Well, maybe one day you will change your mind about sharing your joints.

@RicoCordova 5 жыл бұрын

I would be happy to share a joint with you and keep the discussion focused on finance. :)

@BenFelixCSI 5 жыл бұрын

@@RicoCordova there's a podcast idea in there somewhere.

@RicoCordova 5 жыл бұрын

@@BenFelixCSI Definitely, but I think Joe Rogan has the monopoly on this idea. haha

@BenFelixCSI 5 жыл бұрын

Not for strictly finance discussions. We can call it high finance.

@zenastronomy 2 жыл бұрын

would have preferred the video look at preferred shares versus ordinary shares pros and cons rather than comparing it to bonds. as the decision is usually which share to buy in a company a preferred or ordinary one. not whether to invest in bonds or preferred shares.

@thestrappingentrepreneur2822 5 жыл бұрын

Don’t they historically return better returns then bonds do? Index wise. Wouldn’t you get a greater long term return with perfereds then bonds I deal with taxable accounts only.

@BenFelixCSI 5 жыл бұрын

But you’d be taking stock-like risk. You would expect better risk adjusted returns from stocks or a mix of stocks and bonds than from prefs.

@thestrappingentrepreneur2822 5 жыл бұрын

What about a common, perfered mix. Just playing devils advocate I really want to dig deep into this. I’m all common equity’s now, however once I hit my 50s I’ll probably start shifting it a bit I’ve considered perfereds over bonds due to there tax advantage with me using a normal brokerage account vs retirement and high yields.

@BenFelixCSI 5 жыл бұрын

I’d still go total market common stocks with a mix of bonds as needed.