Preferred shares are classified as Fixed Income and, thus, should be included in this asset category when considering them as an investment option.
Preferred shares offer dividend yields that are typically higher than bond market yields, money market yields and common share dividend yields.
Preferred share returns have low correlations with common share returns, making them good diversifiers. They also have relatively low correlations with bonds, with expected volatility and returns between those of common shares and bonds. This characteristic makes them a good complement to a bond portfolio.
For example, if an investor has established their investment asset mix as 70% invested in Fixed Income investments and 30% invested in Growth investments, then preferred shares should be considered to be part of the 70% invested in Fixed Income.
When investing in financial assets, investors need to maintain a strong balance and diversification within each asset category. When selecting Fixed Income investments investors need to ensure they diversify between Fixed Income options.
As a general rule, if an investor chooses to invest in preferred shares, they should limit preferred share investments to a weighting of approximately 20% of the total portfolio value. In our example, this would enable the investor to allocate 50% to bonds, Guaranteed Investment Certificates(GICs) and other Fixed Income investment types.