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| Home > Finance > Grant Hicks |
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Retirement Planning with Grant W. Hicks
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 Grant
Hicks, C.I.M., FCSI is a professional speaker, co-author and
a Retirement Planning Specialist A leader in
the financial industry, Grant has been helping Vancouver
Island residents plan and create their retirement lifestyles
since 1989. |
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A
secret to getting more retirement income - and less tax! |
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If you’re looking for less volatility and more income,
preferred shares are worth a look.
Preferred shares are simple to understand. Preferreds are
issued by major Canadian corporations and tend to be more
of a debt obligation than an equity issue for the company.
They are junior to bondholders but senior to common
shareholders in relation to payments and access to assets
in the case of insolvency.
Preferred shares generally pay a fixed dividend, which may
change after specific anniversary dates. They generally
fluctuate based on the credit rating of the underlying
issuer as well as with the general interest rate
environment.
Preferreds enjoy attractive yields relative to common
shares and bonds. When held outside a registered plan, a
dividend yield of 6 percent is roughly equivalent to an
interest yield of 7.8 percent at the top marginal tax
bracket due to the dividend tax credit. Dividend payments
are very reliable when issued by well-capitalized, solid
companies, such as Canadian banks and conglomerates.
The have flexibility due to the various types of
preferreds: straight, retractable, fixed-reset,
convertible, etc. There is also US-pay preferreds are
issued by Canadian corporations but are denominated in US
dollars and are fully entitled to the dividend tax credit
for US dollar accounts. Preferreds do not generally need
to be traded once you have acquired them.
Similar to bonds, they can be bought and held within a
portfolio as part of the fixed-income component. What to
Look for When Shopping for Preferreds
Try to buy the issues that trade at or below par
(par is usually 25 or 50 dollars) in order to avoid a
capital loss upon redemption. Look at both current yield
and yield to first call to make sure both are attractive.
This can get tricky and these yields can differ
significantly from time to time. Make sure that the
dividend is cumulative unless issued by a major bank.
Banks, as a general rule, do not use the cumulative
feature because they are unlikely to default on their
dividend, making the cumulative feature less necessary.
Request the rating of a Canadian preferred, ask for the
"S&P’s Harmonized Rating". It runs from P-1 (superior
credit quality) to P-5 (a speculative rating). You should
stick with P-1 and P-2 issues for most of your preferred
portfolio.
Finally, Buy various types of preferreds: straight,
retractable, fixed-reset, and US dollar-pay if you have US
dollar accounts. What do you prefer?
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