A preferred share is a specific type of equity investment that regularly pays the investor a set amount of money
(a.k.a. a dividend) out of the company's profits. They are called preferreds because the investor has preferential
claim over common shareholders with respect to the payment of dividends and also on liquidation. Often preferred
shares are convertible to common shares.
The role of preferreds in your portfolio
Preferred shares, although considered a "fixed income" product are a sort of bond-equity hybrid. They are like a bond
because the investor receives a regular cash payment. Also, their prices are affected by fluctuations in interest rates - just
like bonds. However unlike bonds, preferred shares are usually convertible to voting shares should the company fail to
pay scheduled dividends to its preferred shareholders for a specified number of periods. This allows the investor to
effect change in the organization if it is doing poorly - just like an equity investment.
Given this dual role, the Canadian government has given preferred shares a preferential tax treatment over other
"fixed income"-type investments. Only 75% of dividend income is taxable (versus 100% of interest income). This makes
preferred shares an attractive investment for investors looking for a source of income from their non-tax sheltered
investments. If you are living off your investments (i.e. you are fully or partially retired), there is a good chance
that having some preferreds in the non-RRSP/RRIF portion of your portfolio is a good idea.
Contact us for recommendations
If you are wondering if preferred shares might be a suitable addition to your portfolio, please contact your ScotiaMcLeod Wealth Advisor.
He/she can review your portfolio with you and also help you navigate the myriad choices available. From preferred mutual
funds and dividend mutual funds to our preferred share recommended list, there is a wide variety of investments
available to meet your needs.
More on preferred shares
The information contained on this website is for use by persons resident in Canada only.
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