Ishare preferred series#

However, depending on the issuer's factsheet, these shares can only be redeemed after having been fully paid for and other conditions being met like maturity date and mandatory redemption. With the fall in interest rates, companies have been increasingly looking for cheaper credit with one of the options being exercising rights on redeemable preference shares. Now, in addition to the risks of dividends trending lower, I assess challenges from the macroeconomic environment.

Ishare preferred series#

On further analysis, one of the reasons for PFF's share price appreciating is individual names like the Broadcom Inc 8% Mandatory Convertible Preferred Stock Series A ( AVGOP), at 2.26% of holdings going up by 16.7% in the last year. Hence, for an investor who has been reinvesting dividends, there has been a capital appreciation of about 8% and 18% during the last one and three years respectively. Still, the total returns (performance inclusive of both share price appreciation and dividends) have been increasing. However, even PFF has been impacted by the falling dividends, sometimes quite abruptly.įigure 3: Performance of PFF's share price, dividend, and total return: For example, one share of preferred can be changed into two shares of common stock after a pre-set time period with the option that the issuer can even force preferred owners to make that conversion.Ĭonsequently, there can be variations as to the distributions in the case of individual preferred stocks mostly as a result of early redemption by issuers, making an investment in a collective tool like PFF more plausible. This is normally followed by the issue of new shares with lower dividend yields.Īdditionally, many preferreds are also convertible, as shares can be changed into common stock again as per the prospectus. The reason is that most preferreds are callable, signifying that investors may be forced to sell their shares back to the issuing company at the prevailing market price or for a price specified in the prospectus. On the other hand, while preferred may pay out more than bonds, those dividends are not necessarily consistent in terms of the monthly quantity paid. Looking deeper, the name 'preferred' stems from the fact that the dividends have to be paid before those that go to the common stockholders and this takes all its importance during economic downturns when owning a priority asset is synonymous with less stress. Here, investors will note that these two iShares ETFs do not hold preferential shares or bonds of the same issuing companies but my point with the comparison is to show that while bonds with a 5% gain over the last year can be a valid tool to weather market fluctuations but do not offer the same high stock performance as the preferreds, especially when an investor manages to get the timing right. This is the period following the spring market crash.įigure 2: Performance comparison between bonds and preferreds: Aggregate Bond ETF ( AGG) by nearly 15% for the last nine months. More importantly, preferreds are positively correlated to the stock market and PFF has been outperforming the iShares U.S. Additionally, they get a relatively secured dividend payment over the contract period.

whereby investors who invest in the first institutional financing round (Series A), are entitled to advantages in a number of situations. The alternative is preferential stocks, an asset class mostly prevalent in the U.S. These low yields have been dissuading investors from looking into the asset class with the discouragement accentuated by the weak correlation of bonds to the equity market.

With the current low rates, investment-grade ones are only yielding something like 1.2-1.5% for a well-rated company. When a company is looking for capital, it usually issues bonds. This asset class is called preferred shares and benefits from the advantages of two worlds: bonds and common stocks.įor investors, it is important to get down to the nitty-gritty of the matter. Now, one form of asset allocation which is halfway between stocks and bonds exists. However, the task is not easy as cash and treasury bonds are no longer performing. With a view of diversifying their portfolio, equity investors tend to look for returns where they can find them. Source: Table built following comparison of different asset classes Preference shares are often equated to bonds but there are differences.įigure 1: Some key differences between preferreds, commons, and bonds: An investment in preference stocks (preferreds) through the iShares Preferred and Income Securities ETF ( NASDAQ: PFF) traded daily on stock exchanges is a decent way to earn a high fixed income.