Last week’s blog introduced a new white paper, The Role of Preferred Shares in Your Portfolio, coauthored with my colleague Raymond Kerzérho, director of research at PWL Capital. That article looked at the reasons investors might consider adding Canadian preferred shares to a diversified portfolio: namely high yields relative to corporate bonds, tax-favoured dividend income, and low correlation with other asset classes.
Those are three tempting reasons to use preferred shares. But as Raymond and I explain in our paper, the overall risk-reward trade-off in this asset class is not particularly compelling. In my opinion, most balanced portfolios would likely be better off without preferred shares. For those who want to add them to the mix, we make the following recommendations:
Only use preferreds in non-registered accounts. While preferred shares may be a diversifier in any portfolio, their largest benefit is their tax-advantaged dividend income. If you need current income from a non-registered account, preferreds can be a good alternative to corporate bonds, which are often very tax-inefficient. While preferreds carry more risk than bonds issued by the same corporation, this tax advantage should provide adequate compensation.