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Preferred Shares vs. Common Shares Explained

Preferred shares are a type of equity security that grants ownership in a company, similar to common shares. However, they possess several unique features that set them apart from their common share counterparts. One of the primary distinctions is the priority given to preferred shareholders regarding dividend payments and claims on company assets in the event of liquidation.

Unlike common shares, preferred shares typically offer a fixed dividend that is paid out at regular intervals, usually quarterly. This fixed dividend provides investors with a more stable and predictable income stream, making preferred shares an attractive option for those seeking reliable cash flow.

Another key difference between preferred and common shares lies in voting rights. While common shareholders generally have voting rights that allow them to participate in corporate decision-making processes, preferred shareholders typically do not possess such rights. This lack of voting power is often balanced by the preferential treatment preferred shareholders receive regarding dividend payments and asset claims.

In the event of a company's liquidation, preferred shareholders have a higher claim on the company's assets than common shareholders. This means preferred shareholders are more likely to recover their investment if the company faces financial difficulties or bankruptcy. However, it is important to note that bondholders and other creditors still have priority over preferred shareholders in such situations.

Benefits Of Preferred Shares

Preferred shares offer several benefits to investors, making them an attractive option for certain investment strategies. One of the primary advantages is the potential for higher dividend yields. The fixed nature of preferred share dividends also provides a degree of stability and predictability to an investment portfolio. This can be especially valuable for investors who rely on regular income streams, such as retirees or those approaching retirement. The consistent dividend payments can help offset market volatility and provide a steady source of cash flow.

Another benefit of preferred shares is their potential for capital appreciation. While preferred shares typically experience less price volatility than common shares, they can still increase in value over time. This potential for both income and capital growth makes preferred shares an attractive option for investors seeking a balance between stability and growth potential.

Preferred shares also offer tax advantages in certain jurisdictions. In Canada, for example, dividends from preferred shares may be eligible for the dividend tax credit, potentially resulting in more favorable tax treatment compared to interest income from bonds.

It's worth noting that preferred shares come in various types, each with its own set of characteristics and features. Some common types include cumulative preferred shares, which allow for the accumulation of unpaid dividends; non-cumulative preferred shares, which do not accumulate unpaid dividends; convertible preferred shares, which can be converted into common shares under certain conditions; and rate reset preferred shares, which have their dividend rates adjusted periodically based on prevailing interest rates.

Investing In Preferred Shares Via ETFs

For investors looking to gain exposure to preferred shares, several ETFs facilitate this access, namely, the BMO Laddered Preferred Share Index ETF (Ticker: ZPR), iShares S&P/TSX Canadian Preferred Share Index ETF (Ticker: CPD), RBC Canadian Preferred Share ETF (Ticker: RPF), and Horizons Active Preferred Share ETF (Ticker: HPR).

The BMO Laddered Preferred Share Index ETF (Ticker: ZPR) is designed to replicate the performance of the Solactive Laddered Canadian Preferred Share Index. This ETF focuses on rate-reset preferred shares, which have become increasingly popular in recent years due to their ability to adjust dividend rates based on changes in interest rates. ZPR provides investors with exposure to a diversified portfolio of Canadian rate-reset preferred shares, offering the potential for both income and capital appreciation.

The iShares S&P/TSX Canadian Preferred Share Index ETF (Ticker: CPD) aims to provide long-term capital growth by replicating the performance of the S&P/TSX Preferred Share Index, net of expenses. This ETF offers broad exposure to the Canadian preferred share market, including various types of preferred shares such as rate resets, perpetuals, and floating rate preferreds. CPD provides investors with a diversified approach to preferred share investing, potentially reducing individual security risk.

The RBC Canadian Preferred Share ETF (Ticker: RPF) is actively managed. This ETF invests primarily in preferred shares of Canadian companies, aiming to provide investors with exposure to a diversified portfolio of preferred securities. RPF offers investors the potential for tax-efficient income and the opportunity to benefit from potential interest rate changes.

The Horizons Active Preferred Share ETF (Ticker: HPR) takes an active management approach to preferred share investing. Unlike the previously mentioned ETFs that track specific indices, HPR's portfolio managers actively select and manage the fund's holdings. This active strategy allows the fund to potentially capitalize on market opportunities and adjust the portfolio based on changing market conditions. HPR aims to provide investors with a high level of tax-efficient income while preserving capital.

Takeaway

Preferred shares offer a unique investment opportunity that combines elements of both stocks and bonds. These ETFs offer investors various ways to gain exposure to the preferred share market, each with its own unique approach and focus. By investing in these ETFs, investors can potentially benefit from the advantages of preferred shares, such as higher yields and tax-efficient income, while also enjoying the diversification benefits of holding a basket of securities.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.