Dear Nancy
I am looking for a good preferred share (just missed out on IPO of BCE at 4.15 per cent yield) for my RSP which will be converted into a RIF in 2012. Can you recommend one? I don't want a perpetual and would like a yield at better than 4 per cent. A high-rated issuer like a bank or corporate blue chip would be ideal.
Thanks
Peggy
Dear Peggy,
I am unable to give you a specific recommendation in this public forum due to restrictions. I will suggest to you that you look at fixed floaters or bank-issued preferreds that were issued in the fall of 2007 and spring of 2008.
They were fixed-rate for five years with a rate reset after the five years are up. They were issued to have a rate reset of a pre-set amount plus the five-year Government of Canada bond yield. The holder can also opt to have it switched to a floating-rate. In some cases, the pre-set amounts are quite high. Because of that predetermined high reset rate, there is a strong probability that those shares will be redeemed by the issuer.
With that in mind, when you are analyzing preferred shares, be careful that you understand that the coupon rate will not necessarily be the yield to redemption, retraction or reset. It will depend on the current market price versus this issue price.
For example, if the reset preferred was issued with a yield of 5 per cent at $25 and currently trades at $26, the yield will be lower than the 5 per cent to reset date. Conversely, if it currently trades at $24, the yield will be higher than 5 per cent.
Seeking professional advice to get the true yield would be useful, unless you are proficient with the financial calculations.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com
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