A comment on Preferred Shares

Preferred shares can be attractive for yield especially in taxable accounts given the dividend tax credit.

But my experience has been that buying them near (much less above) the normal issue price of $25 has not worked out well.

Rate reset pref shares which became popular were supposed to protect us from the expected rate increases. Instead interest rates kept falling and rate reset shares fell in value. Precipitously in some cases. Some have never recovered. Others periodically did recover when rates rose somewhat. These shares also dove at times of great market uncertainty, notably the initial COVID crash in the Spring of 2020.  These turned out to be really great investments when bought under about $15.

Older style perpetual pref shares with constant dividends fared a lot better when interest rates plunged. They should rise in value in that case. But they never soared like a true perpetual would because the issuers (in most cases) had the right to buy them back usually at $25. This tended to cap their upside at $26 or usually about $27 at most.

The bottom line seems to be that preferred shares are best bought when they are significantly on sale. A perpetual with a good yield bought at $25 might be pretty good – except it won’t be if interest rates do rise a lot.

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