A preferred share is a specific type of equity investment that regularly pays the investor a set amount of money (a.k.a. a dividend) out of the company's profits. They are called preferreds because the investor has preferential claim over common shareholders with respect to the payment of dividends and also on liquidation. Often preferred shares are convertible to common shares.
Preferred shares, although considered a "fixed income" product are a sort of bond-equity hybrid. They are like a bond because the investor receives a regular cash payment. Also, their prices are affected by fluctuations in interest rates - just like bonds. However unlike bonds, preferred shares are usually convertible to voting shares should the company fail to pay scheduled dividends to its preferred shareholders for a specified number of periods. This allows the investor to effect change in the organization if it is doing poorly - just like an equity investment.
Given this dual role, the Canadian government has given preferred shares a preferential tax treatment over other "fixed income"-type investments. Only 75% of dividend income is taxable (versus 100% of interest income). This makes preferred shares an attractive investment for investors looking for a source of income from their non-tax sheltered investments. If you are living off your investments (i.e. you are fully or partially retired), there is a good chance that having some preferreds in the non-RRSP/RRIF portion of your portfolio is a good idea.
If you are wondering if preferred shares might be a suitable addition to your portfolio, give us a call. We can review your portfolio with you and also help you navigate the myriad choices available. From preferred mutual funds and dividend mutual funds to our preferred share recommended list, there is a wide variety of investments available to meet your needs.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
By continuing through this site you acknowledge that you agree to the terms in the Legal Notices.