Investing

High Yield (6%+) and Monthly / Quarterly Dividend Distribution ETFs / Stocks

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  • Oct 30th, 2017 6:53 pm
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Jun 28, 2017
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I'm a rookie investor, so don't take my opinion for anything of value.
However I've tried to build a portfolio of high yielding companies for short term gain, with the aim of using the profits to buy more reliable dividend growers in a year or two.
So far my portfolio includes CJ, KWH.UN, CUF.UN, CJR.B, BRE, TNT.UN, CWX, CBL, DGS, INC.UN as well as ALA, CHR, EIF, CM, ENB.

CBL was a bad buy. But I'm happy with all the others even if ENB, CJR.B and KWH.UN have had a rough ride recently. I collect 9.5% in dividends, and I'm up on capital gains too. Except for CUF.UN, they all have reasonable payout ratios, KWH.UN, BRE, INC.UN, CM, ALA have all increased dividends, and they have decent fundamentals from what I gather. If you're going to chase high yield, there's a lot more risk involved and timing becomes more important. You're buying companies with a distressed SP. For example EIF was the target of a short attack by Cohodes, ALA made a major acquisition, TNT.UN issued a bought deal lower than the trading price, CUF.UN had cut distributions, bears have control of the energy sector...etc. But I'm young, I can accept the risk, and I enjoy getting paid handsomely to wait for the stock to shake off the uncertainty that has distressed it.
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Aug 2, 2001
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xgbsSS wrote: Rate-reset preferreds became a popular type issued and the majority of preferred shares issued these days are rate-reset. Rate-reset are set to a specific yield. A common one is the Bank of Canada 5 year Bond. As an example, let's look at VersaBank's Series 1 Preferred Share prospectus. (http://www.versabank.com/investor-relations/securities/), You will notice that this series pays 7.0% (on $10.00 par value) annualized dividend quarterly until October 31, 2019. On October 31, 2019, the dividend rate will "reset" to the same yield 5 year Bank of Canada Bond yields plus 543 basis points. This means the dividend rate may be higher or lower starting October 31, 2019. When these preferreds were first being issued, interest rates were historically low already and so there was a need to add these kind of rules so that people weren't stuck with low yielding preferreds. But interest rates further fell and many issues ended up yielding even lower, hence the drop in price.

So because of these rate-resets, it is very important to read the prospectus so you understand what you are actually buying. The yield you are currently getting may not be permanent..
Thanks for the detailed explanation!

So with the rate-reset ones, does the price drop in value after the 5 year term (when the rate resets)?

If I understand correctly, if at the time the 5 year yield is 2.0% it would now reset to 2.543%. Am I missing something or does that mean it would be less desirable at that point?


You're really selling me on the idea of these - they seem to be a great addition to diversify my portfolio.

Edit: Would this link seem like an accurate depiction? It seems to match with what you're saying and goes into detail on the various types.
https://www.bmo.com/pdf/Understanding%2 ... _FINAL.pdf

And would this article highlight some of the potential risks - such as upon rate reset value drops dramatically if yields are low:
https://beta.theglobeandmail.com/globe- ... ndmail.com&
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May 11, 2014
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TrevorK wrote: Thanks for the detailed explanation!

So with the rate-reset ones, does the price drop in value after the 5 year term (when the rate resets)?

If I understand correctly, if at the time the 5 year yield is 2.0% it would now reset to 2.543%. Am I missing something or does that mean it would be less desirable at that point?


You're really selling me on the idea of these - they seem to be a great addition to diversify my portfolio.
Not quite! 543 basepoints is 5.43%, so for this Versabank Preferred Series 1 Shares (TSX:VB-A), the yield would actually be 7.43% not, 2.543%. 100bp = 1% . So let's say the yield did come up to 7.43%. This may make some people want to buy the shares at slightly higher than $10. But probably not that much higher because the redemption value is still only at par should Versabank chose to do so. Also, the likelihood of Versabank to elect to redeem them increases because of the higher yield. Conversely, let's say the 5 year yield became 1%. The new yield is 6.43%. For some investors, that yield is insufficient return for holding the preferred equity of this company so likely there will be pressure on the price of the shares, so you may see it trade lower than what we generally see. However, the redemption option by Versabank at par does keep this somewhat limited because investors may generally say, at some point, Versabank will pay my $10 back.

If you are looking a preferreds, you need to understand the value proposition of the company you are buying from. Companies can go bankrupt or not have the cash flow to cover their dividends. Aimia is a very recent example where their preferred holders are now stuck.

One big drawback you need to also keep in mind is the low liquidity. Versabank is a good example. There are many days it doesn't trade. You may notice many random trades on different days where people have sold the shares for as little as $9.50 or buying it at +$10. This is often a mistake of someone putting it in as a market order, or someone not being patient. People need cash and sell at a random price or take a hair cut. One strategy you may see people do is putting a Good-Til-Cancel Order with a low-ball price and seeing whether they happen to purchase it. And because of it, should you happen to be holding it with a lower reset-yield, you may end up with a capital-loss. ( I have held Versabank common and own a small amount of Versabank preferreds currently)

Other times, reading company investor presentations or earnings release, management may want to move toward redeeming preferreds as then there is less cash-flow constraint.
Versabank tried issuing new preferreds I think in the hopes to have capital ready so they can redeem Series 1 on October 31, 2019 and setting new preferred at a lower rate before interest rates get any higher. Unfortunately for Versa, they didn't have enough takers.
But this kind of news can suggest that the company may imminently want to redeem the shares at par as per the prospectus.
http://www.businesswire.com/news/home/2 ... e-Offering
http://www.businesswire.com/news/home/2 ... Prospectus

Of course if you are holding it as an income portion of a portfolio, you shouldn't really have to keep buying or selling, but it is something you should keep in mind. And although they are safer than common shares, bond holders are paid out first.
So while short-term, (rate-reset) preferreds may do better than bonds (due to rising interest rates), you need to think what you ultimate goal of your income portion of your portfolio is.
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TrevorK wrote: Edit: Would this link seem like an accurate depiction? It seems to match with what you're saying and goes into detail on the various types.
https://www.bmo.com/pdf/Understanding%2 ... _FINAL.pdf

And would this article highlight some of the potential risks - such as upon rate reset value drops dramatically if yields are low:
https://beta.theglobeandmail.com/globe- ... ndmail.com&
Bingo! That BMO article is great as it talks about the different kinds of preferreds. As you can see, it is mostly rate-resets that are out there. And the Globe article is on the dot too. One of the toughest parts about comparing different rate-reset preferreds are their reset dates. They all are issued on different dates. So while two preferreds may look identical, should one's preferred's rate reset before the other, the value proposition might change based on where interest rates are.
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Jul 27, 2017
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CIBC wood gundy issue a preferred share report every quarter. I have followed this since 2007. Its difficult to get the latest

in the link below you will see every preferred, their status etc. page 25 to 28 in the link has the index listing

https://www.cibcwg.com/c/document_libra ... pId=262774

brokers such as Raymond James provide regular updates that include the simple explanation of the various types.

https://www.raymondjames.ca/Branches/pr ... report.pdf

as well as other information that many brokers provide on-line to the public...free

https://www.raymondjames.ca/branches/Ba ... Trends.pdf
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Aug 2, 2001
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xgbsSS wrote: Not quite! 543 basepoints is 5.43%, so for this Versabank Preferred Series 1 Shares (TSX:VB-A), the yield would actually be 7.43% not, 2.543%. 100bp = 1% .


LOL that was a big mistake I made then.
So let's say the yield did come up to 7.43%. This may make some people want to buy the shares at slightly higher than $10. But probably not that much higher because the redemption value is still only at par should Versabank chose to do so. Also, the likelihood of Versabank to elect to redeem them increases because of the higher yield. Conversely, let's say the 5 year yield became 1%. The new yield is 6.43%. For some investors, that yield is insufficient return for holding the preferred equity of this company so likely there will be pressure on the price of the shares, so you may see it trade lower than what we generally see. However, the redemption option by Versabank at par does keep this somewhat limited because investors may generally say, at some point, Versabank will pay my $10 back.

If you are looking a preferreds, you need to understand the value proposition of the company you are buying from. Companies can go bankrupt or not have the cash flow to cover their dividends. Aimia is a very recent example where their preferred holders are now stuck.

One big drawback you need to also keep in mind is the low liquidity. Versabank is a good example. There are many days it doesn't trade. You may notice many random trades on different days where people have sold the shares for as little as $9.50 or buying it at +$10. This is often a mistake of someone putting it in as a market order, or someone not being patient. People need cash and sell at a random price or take a hair cut. One strategy you may see people do is putting a Good-Til-Cancel Order with a low-ball price and seeing whether they happen to purchase it. And because of it, should you happen to be holding it with a lower reset-yield, you may end up with a capital-loss. ( I have held Versabank common and own a small amount of Versabank preferreds currently)

Other times, reading company investor presentations or earnings release, management may want to move toward redeeming preferreds as then there is less cash-flow constraint.
Versabank tried issuing new preferreds I think in the hopes to have capital ready so they can redeem Series 1 on October 31, 2019 and setting new preferred at a lower rate before interest rates get any higher. Unfortunately for Versa, they didn't have enough takers.
But this kind of news can suggest that the company may imminently want to redeem the shares at par as per the prospectus.
http://www.businesswire.com/news/home/2 ... e-Offering
http://www.businesswire.com/news/home/2 ... Prospectus

Of course if you are holding it as an income portion of a portfolio, you shouldn't really have to keep buying or selling, but it is something you should keep in mind. And although they are safer than common shares, bond holders are paid out first.
So while short-term, (rate-reset) preferreds may do better than bonds (due to rising interest rates), you need to think what you ultimate goal of your income portion of your portfolio is.
If I understand correctly, in the case of Versabank they tried to raise case to buy back a series of preferred shares because they thought they would be able to sell shares in the current environment at a lower rate. Because preferred shares hold their initial value, they would pay back each shareholder $10 that it was issued (if they paid $9.50 or $10.50 it is irrelevant). Therefore, there is potential speculation that if you could pay less than $10/share you might walk away with a small capital gain - and if you paid more than $10/share you might end up with a capital loss. It would be in Versabanks interest to try and redeem preferred shares if they could sell another series of them at a lower interest rate - since they have to ability to call them back at any time.

It sounds like some of the risks are:
a) No one will want to buy your shares back or it may take awhile
b) Companies go bankrupt / cannot pay (you are ahead of common shares though for payback)
c) The "rate reset" rate may be significantly lower than expected (e.g. the 5 year bond yield it was matching is 2% lower than it was when the shares were issued, I would assume this happened within the past 5-10 years). Point (a) means you might be stuck with them for awhile
d) You could have your shares bought back (but it sounds like it might not be at will, but rather at the renewal. I guess every one could be different?)
e) Appreciation beyond issue price is limited (realistically demand for the shares means they are paying a great dividend and that would be a sign the company should look at buying them back?)
f) Depreciation below issue price is real - such as situation (c) and (a) meaning if you want to sell you may be at the mercy of a very limited market (as opposed to selling common shares where at least there are large numbers of buyers)

With your explanation I'm losing a little bit of interest. It seems like a good idea to hold within a diversified portfolio where you are allocating it towards a fixed income component, but you do lose a lot of potential capital appreciation (although I guess that's the risk/reward proposition?).
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xgbsSS wrote: Bingo! That BMO article is great as it talks about the different kinds of preferreds. As you can see, it is mostly rate-resets that are out there. And the Globe article is on the dot too. One of the toughest parts about comparing different rate-reset preferreds are their reset dates. They all are issued on different dates. So while two preferreds may look identical, should one's preferred's rate reset before the other, the value proposition might change based on where interest rates are.
Seems a little tougher than I was initially thinking!

Thanks again for all the details on it, it's something I have always been interested in because I see the offerings come into my email all the time and never quite understood why the rates they offered were attractive (for the time) in offerings such as the Big 5 banks. Now I can see that in cases like that you are likely giving up potential appreciation you would have received with common shares for more of a fixed dividend. Which I think makes some sense if you are looking more towards fixed income (much lower risk of the big 5 cancelling dividends) because you are being given a known return.
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If I understand correctly, in the case of Versabank they tried to raise case to buy back a series of preferred shares because they thought they would be able to sell shares in the current environment at a lower rate. Because preferred shares hold their initial value, they would pay back each shareholder $10 that it was issued (if they paid $9.50 or $10.50 it is irrelevant). Therefore, there is potential speculation that if you could pay less than $10/share you might walk away with a small capital gain - and if you paid more than $10/share you might end up with a capital loss. It would be in Versabanks interest to try and redeem preferred shares if they could sell another series of them at a lower interest rate - since they have to ability to call them back at any time. Yes, and so companies will try to do that. You can almost think of it like a mortgage, there are rules they have to follow to break the term

It sounds like some of the risks are:
a) No one will want to buy your shares back or it may take awhile -Yes
b) Companies go bankrupt / cannot pay (you are ahead of common shares though for payback)[Yes, but that is really any investment
c) The "rate reset" rate may be significantly lower than expected (e.g. the 5 year bond yield it was matching is 2% lower than it was when the shares were issued, I would assume this happened within the past 5-10 years). Point (a) means you might be stuck with them for awhile
yes
d) You could have your shares bought back (but it sounds like it might not be at will, but rather at the renewal. I guess every one could be different? )yes again, but there are generally times around this and depends how the prospectus is set. If I'm not mistaken, Versabank can only elect to redeem them on the 5 year anniversary. Other times there are specific cases. One recent case is Rona Preferred Shares. Lowe's bought them out and was trying to redeem Preferreds set at par $25 for $20 by getting shareholders to vote on this. Of course this got rejected and Lowe's has to come with a better solution
http://business.financialpost.com/inves ... areholders
http://business.financialpost.com/news/ ... 25-a-share

e) Appreciation beyond issue price is limited (realistically demand for the shares means they are paying a great dividend and that would be a sign the company should look at buying them back?)
f) Depreciation below issue price is real - such as situation (c) and (a) meaning if you want to sell you may be at the mercy of a very limited market (as opposed to selling common shares where at least there are large numbers of buyers)

I think the key here will be when you buy, how you buy and take advantage of the situation. I have done a good trade with Versabank when it was originally Pacific and Western Bank. You have to assess the market for each share and understand how it operates. Each preferred will differ and you have to understand the characteristics of each. I believe I was looking at an earlier question about Husky's preferred. These are a 5 year GoC bond yield +1.5ish% and they were originally set at 4.5%. So when it reset, the yield dropped significantly leading to a huge downshift in the price. Picking these shares up when they were really low and betting on a longer term interest rate hike will likely lead to nice future dividends as well as possibly large capital gain.

With your explanation I'm losing a little bit of interest. It seems like a good idea to hold within a diversified portfolio where you are allocating it towards a fixed income component, but you do lose a lot of potential capital appreciation (although I guess that's the risk/reward proposition?).

I think in the end you have to decide it on a case-by-case basis. Some preferreds have good liquidity, some don't. Others are resetting at a perfect time, while others at the worst. Finding a few you like is the best way to take advantage of it. There are ETFs that try to ladder the reset dates to average it out and it is possible to have a nice income alternate this way, however, I find buying individual will allow you take opportunistic trades more so not my favourite way to invest in them
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xgbsSS wrote: I think in the end you have to decide it on a case-by-case basis. Some preferreds have good liquidity, some don't. Others are resetting at a perfect time, while others at the worst. Finding a few you like is the best way to take advantage of it. There are ETFs that try to ladder the reset dates to average it out and it is possible to have a nice income alternate this way, however, I find buying individual will allow you take opportunistic trades more so not my favourite way to invest in them
Thanks again - your answers make a lot of sense. It's definitely something I'm going to start looking into more!
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I am long LFE.

With the economy stabilizing somewhat and interest rates increasing slowly, I think insurance companies are decent.

I bought the shares at $5 and at that price (rather the NAV) it is like a triple leveraged ETF. Should the underlying increase 5%, the NAV of the shares rises 15%.

Of course should the underlying decline 5%, the NAV declines three times as well (15%).

Interesting to look into at least.
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Thanks again to all of you who have contributed to this thread thus far! A lot of great reading and I have since added a lot of your recommendations to my watch list. xgbsSS, big thank you for your explanation on preferred vs. common stock. Will definitely consider preferreds as part of my portfolio going forward.
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I think preferreds should be considered as a fixed income/bond alternative.

Dividends are usually taxed more favourably than interest.

To be honest on some of the risky equities/income trusts, I think they ought to have higher yields (lower prices), but as interest rates have remained low for a prolonged period, their is more money chasing yield in equities.

And thus something that should yield say 12%, now yields 6 or 7.

Waiting for reality to hit as they usually overshoot if bad news comes as retail gets taken to the shed and the wolves wait.
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illusion81 wrote: Thanks for the replies thus far, very informative. I guess I'm not just looking at ETFs, but relatively safe stocks that pay a high monthly / quarterly dividend. I understand that nothing is guaranteed in life, but I'm sure there are stocks out there that don't move too much throughout the month and offer a decent monthly / quarterly dividend. They may not offer much growth, but I'm OK with that as I'm more interested in the dividend.
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