stocktrends.ca
The Stock
Claymore S&P/TSX Canadian preferred share ETF (CPD-T)
Recent price
$16.99
Trend
The plethora of preferred shares hitting new 52-week highs shows that investors continue to be drawn to their attractive yields, particularly in an interest rate environment where the banking sector is generating healthy cash flow. Notable movers in the group last week were issues from Brookfield Asset Management, CIBC, HSBC Bank Canada and Sun Life Financial, all hitting highs and outperforming the broad market in the past three months. The S&P/TSX preferred share index has now recouped its losses dating from last summer, and has trended positively since financial stocks started their thaw in the spring. Improved balance sheets in the sector and successful new equity offerings such as the Brookfield Properties overallotment and share sale bode well for income investors.
The Trade
Although smart investors will hunt for premium preferred shares with a fine tooth comb, looking for the most secure issues with the best yield, trading the general strength of this broad group of secured securities is more easily facilitated by exchange-traded funds that allow for a diversified position. In Canada, the Claymore S&P/TSX Canadian preferred share ETF has been trading on the Toronto Stock Exchange since the spring of 2007, spending its first two years in a bear trend. Since the end of May, though, the fund has been Stock Trends Bullish and riding the wave of recovery building in financials - it is 84 per cent weighted in the sector. Currently yielding 4.9 per cent, CPD hit a high of $17.01 last week, a mark that brought the fund to a resistance level dating from last September. With equity markets due for a pullback, this income trade would be suitable for many investors.
The Upside
The upside of buying preferred shares is always income, security and favourable tax treatment. Low interest rates tend to spur additional money inflows to this den of orphans and grannies, helping the Claymore S&P/TSX Canadian preferred share ETF advance 8 per cent in the past 13 weeks. Expectations of further price appreciation for CPD should be muted; however, its bullish trend could continue during the sector's advance through this quarter, making another 6-per-cent move to the $18 level a possible bonus. Upside surprises for banks as they complete their fiscal year will help elevate expectations for their already bullish preferred shares, but insurers Manulife Financial and Great-West Lifeco - both issuers of the top preferred share holdings of the fund - have faltered recently. Nevertheless, as the banks go, so goes CPD.
The Downside
Broad stock market volatility will make this relatively secure fund a good home for capital. Monday's 3-per-cent slide in the TSX, for example, barely budged CPD - it was only off 0.2 per cent. A significant change in interest rates would put this investment in a different light, but the trend for preferred shares is solidly bullish. Management fees for this Claymore fund is 0.45 per cent, with 66 per cent of fund holdings in perpetual preferred shares.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995.