What are the advantages of investing in preferred shares?
- Preferred shares typically offer dividend yields that are higher than individual bond yields, money market yields and common share yields.
- When preferred shares trade at very high yields and at large spreads against senior debt there is a potential to execute risk arbitrage strategies that benefit from price appreciation if yields return to more normal levels.
- Preferred share returns have low correlations with common share returns, making them a good way to diversify a portfolio. They also have relatively low correlations with bonds, with expected volatility and returns between those of common stocks and bonds. This makes them a good complement to a bond portfolio.
- Preferred shares may be useful in capital arbitrage strategies due to their position in creditor standings between that of equity and other forms of debt, and due to the presence in many preferred shares of an option to convert to common shares or other types of Preferred shares.
- Preferred shares also may contain unique features. These features provide investors with an opportunity to manage their preferred share investments as circumstances change. ie interest rates rise – convert your existing from a Fixed-Rate to a Floating-Rate preferred share and visa versa.