What are some basic characteristics of a preferred share?

The majority of preferred shares have a stated “par value” of $25.00. A few issues may have a par value of $50.00 or $100.00.

The majority of preferred shares are issued and trade on a public stock exchange, but not all. Some preferred shares are issued and held by large institutions and they may not be available for investors to own and trade. Preferred shares that have been issued to a single investor and do not trade on a stock exchange are denoted as a Private Placementand they will not have a CUSIP number nor a trading symbol assigned to them.

The majority of preferred shares pay their dividends quarterly, but some have monthly, semi-annual and annual payment dates.

Preferred shares are not like bonds/debentures, which accrue interest daily and have their accrued interest calculated and paid as part of each purchase and sale. If a preferred share is sold and the settlement date is on or before the ex-dividend date, the investor will not receive three months worth of dividends. If the settlement date is after the ex-dividend date the seller will receive the three months of dividends.  In addition, the preferred share’s market price will tend to adjust for dividend entitlement by declining on the ex-dividend date by an amount close to the dividend declared.

Selecting preferred shares with different payment dates enable income investors to establish a more consistent income stream.

The annual income paid by preferred shares is referred to as the Current dividend yieldand is calculated as follows;

Current Dividend Yield = Annual Dividend paid divided by the preferred share’s price multiplied by 100.

For example, if a preferred share pays annual dividend income $1.565 per share and the share’s price is $25.00, then the current annual dividend yieldis calculated as:

= $1.565 divided by $25.00multiplied by 100

= 6.26% per year.

In Canada, dividend income is given preferential treatment by the federal and provincial governments.  As a result of this lower income taxation, investors will retain a greater portion of the dividend than a similar amount of interest income. The specific income tax benefit received by an investor will be determined by the province and/or territory they reside within.

A few Canadian corporations also issue preferred shares in U.S dollars. These shares are priced in U.S. dollars and they pay their dividends in U.S. dollars. As long as the shares are issued by a Canadian corporation the dividend income will still be taxed at the preferential rate for dividend income.

Preferred Share Example

Below is an example of a features summary for a preferred share. The issuing company’s name has been substituted, but the information format and details have been copied from the Financial Post’s “2009 Preferreds and Derivatives” book:

6.25% Non-Cum. 5-Year Rate Reset Class A First Pref., Series AK

DBRS Rating:      Pfd – 1                                               Apr 20, 2009

      Issued:          14,000,000 shs                   Apr 3, 2009

      O/S:                14,000,000 shs                   Apr 3, 2009

      Dividends:     $1.5625         (Q)                  Jan.31/Apr.30/Jul.31/Oct.31

Dividend Details: Reset on July 31, 2014. Dividend rate will be reset every fifth year thereafter. The annual dividend rate will be equal to the sum of the Government of Canada Yield plus 4.33%.

Redemption: Redeem. On the following dates, on the min. 30 and max. 60 days’ notice, conditional on the approval of the Superintendent of Financial Institutions.

      July 31, 2014………….$25.00                  July 31, 2019………….$25.00

Redeem. On July 31 in every fifth year thereafter on min. 30 and max. 60 days’ notice at $25.00 per sh, conditional on approval of the Superintendent of Financial Institutions.

Exchange: Exchange. Into pfd 1st A ser AL as follows;

On Jul 31, 2014………$25.00………1           On Jul 31, 2019………$25.00………1

Exchange. On July 31 every fifth year thereafter. Also exchange. on bank’s notice at any time on min. 30 days’ notice beginning July 31, 2014 into 1 new class A 1st pref sh per pref. sh, being exchange price per new class A 1st pref sh of $25.00.

Lead Underwriter(s): XYZ Securities Inc

Transfer Agent: ABC Big Trust Company

Registrar: ABC Big Trust Company

Exchanges:  TSX (Toronto Stock Exchange)

Symbol: WT.PR.K

CUSIP: 789456123

In this example a company has issued a preferred share with the description of a 6.25% Non-Cumulative Class A First Preference Share Series AK. The dividend rate will be reset every five years, but for the first five years the dividend is fixed at a rate of 6.25% based upon a $25.00 issue price.

DBRS (Dominion Bond Rating Service) reviewed the issuer’s credit quality and rated these preferred shares with their highest quality rating of Pfd-1, on April 20, 2009.

The company originally issued 14,000,000 preferred shares on April 3, 2009 at a “par value” of $25.00 per share.

The number of shares outstanding and trading in the stock market (O/S) was 14,000,000 as at April 3, 2009.

The shares will pay an annual dividend of $1.5625, per year, per share, in four equal payments on January 31, April 30, July 31, and October 31, each year.

The dividend details describe the timing and formula for establishing the dividend rate in future five-year intervals. For this example, the issuing company will reset the dividend rate on every five-year anniversary and the new dividend rate will be based upon the Government of Canada Yield, at that time, plus 4.33%. So if the Government of Canada Yield is set at 3.0%, then the new dividend rate would be 3.0% plus 4.33% or 7.33%. If the Government of Canada Yield is 1.0% then the new rate will be 5.33%. This new rate will apply to the preferred shares for the next five-year interval.

The terms of Redemption give the issuing company the right to buy back the shares from investors, on every fifth year anniversary beginning July 31, 2015, at a price of $25.00.

The shares also give the shareholder and the issuing company the right to exchange this series of preferred shares into an equal number of a separate preferred share class, Pfd 1st A series AL, at a price equal to $25.00. The series AL shares are a Floating-Ratepreferred that pays a dividend equal to the sum of the T-Bill (or Treasury Bill) rate plus 4.33%. To find the details of the preferred AL shares an investor would need to refer the issuing company’s website.

The company that managed the initial sale of these shares was XYZ Securities Inc., listed as the Lead Underwriter.

The Transfer Agent and the Registrar are ABC Big Trust Company.

The shares trade on the Toronto Stock Exchange under the trading symbol of  WT.PR.K and the CUSIP number is 789456123.

Related Questions