101: What’s a Preferred Share?
Warren Buffet, one of the most notable investors of our time once said:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”
Ultimately this was just a fancy way of saying ‘buy low, sell high.’
While this advice seems relatively obvious, for most investors, they don’t stick to the age-old adage often end up selling on a crash, or buying when an asset value is surging in popularity.
In doing our periodic portfolio rebalancing which is automatically done for all of our clients, we take out the guesswork in doing this. We seek out undervalued assets for purchase and sell those that appear to be overvalued in your portfolio on a regular basis. In our last rebalancing, this opportunity led us to add a new asset class to our ETF portfolios: preferred shares.
Preferred shares are hybrid investments that have characteristics of business debt and business ownership, at the same time.
Like common shares, they represent an ownership stake in the company and like debt, they often pay an ongoing fixed amount.
Unlike common shares, they usually have no voting rights and unlike debt, they have a lower priority of payout.
Why would I want to invest in preferred shares?
Historically their performance isn’t correlated to that of equity and fixed income, which lowers the volatility of the portfolio. They also have a lower volatility than straight equity, so they are a great addition to the business ownership side with a lower risk. They provide greater security than straight equity because of their ranking in a company’s capital structure. Preferred shares also add cash flow to the portfolio. Their dividend rates are predetermined and must be paid out before dividend are paid to equity holders. This means that if the value of your share goes down, the yield on those shares goes up. As preferred shares’ distributions are dividends they’re taxed advantaged when comparing to interest distributions on the fixed income.
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