The reports for the Canadian Western Bank rate reset share CWB.PR.D as well as for Enbridge’s ENB.PF.A are updated and rated (higher) Buy and Strong Buy respectively. See the reports for more detail.
These two have attractive yields of 6.3% and 7.1% respectively. And not only that but they are set to reset to higher dividends in just 11 months and 18 months respectively.
The reset dividends depend entirely on the yield of the Canadian government five year bond at the time of the upcoming resets. That is unknow. The current yield on that bond is 3.6%. For most of the past year this yield has bounced between about 2.9% and 3.6%. Some forecasts call for interest rates to be lower in 2024 when these reset. So it might be prudent and conservative to predict a level around 2.5%. It’s hard to imagine it would be lower although of course that is possible.
As long as that yield at the time of reset is above 0.96% or 1.44% respectively the dividends on these two will increase on the reset date. However in the case of CWB.PR.D which last traded at $23.77 there is a possibility that these would be redeemed in 11 months at $25.
Both of these appear to be attractive at the current yields and even more so when the almost certainly higher dividend at reset in 11 or 18 months is considered.
The above two rate reset shares are considered riskier and less credit worth than those issued by, for example, TD Bank.
You can buy TD.PF.J which last traded at $20.77 to yield 6.9% and it has only recently reset and will therefore pay a dividend that represents a 6.9% yield on the current price for about the next 4.75 years. That would seem to be attractive.
Or consider TD.PF.K which will reset in September. It pays $1.1875 per year and last traded at $20.60 to yield 5.76%. But if the five year Canada is say 3.0% at the reset date then the dividend will rise to $1.3975 to yield 6.8% at the current price. It appears that this share is trading at least partly on the expected increased dividend as opposed to the lower existing dividend.
Another way to invest in rate reset preferred shares is through a preferred share ETF. The dividend on those should be increasing as various rate reset shares reset to higher dividends.
CPD currently yields 6.0% and its dividend is likely to increase over the next year.
ZPR currently yields 6.3% and its dividend is also likely to increase soon.
Canadian preferred shares benefit from the dividend tax credit. The tax rate is therefore usually lower than the tax on wage and interest income. In the unique situation where a taxpayer gets most or all of their income from dividends the tax rate can be extremely low up to about $50,000 per year, depending on the province. for example in Alberta, the marginal tax rate on such eligible dividends is only 2.57% for taxable incomes up to $53,359 and then only 10.18% for taxable income from $53,359 to $106,717. The rates are even lower than that in Ontario! But a fly in the ointment is that the tax is based on a grossed up amount which effectively increases the tax rates and and in some cases can be detrimental when it causes a higher old age pension claw back or a reduction in other benefits such as the Canada child benefit. Still, in many or most cases these dividends are taxed at a lower rate than wage or interest income.
Of course rate reset preferred shares have mostly been a bad investment over the years. They have repeatedly broken investors hearts by falling in value. They fell when interest rates fell but then also often fell when interest rates rose. However when purchased at various low points they have rebounded to provide strong capital gains – but only if then sold at the higher prices. Looking at the current yields and prices and thinking about where the reset dividends are likely to be, it appears that rate reset preferred shares are likely set to provide capital gains in the year ahead. And if nothing else, they are providing high tax-efficient dividends.