What should Canadian investors do: Sell or hold with preferred share losses?

1. Rate reset preferred shares

These became popular following the financial crisis in 2008/2009 to entice investors to buy preferred shares despite low interest rates at that time. They generally “reset” every five years with the dividend rate for the next five years based on a premium over the 5-year Government of Canada bond rate at the time. Rate reset preferred shares currently represent 73% of the Canadian preferred share market.

2. Perpetual preferred shares

These represent 25% of the Canadian preferred share market. Perpetuals have no reset date. Their dividend rate is set when they are issued, and they continue in perpetuity.

3. Floating or variable rate preferred shares

These are like rate resets in that the rate changes, but those changes are more frequent—typically quarterly. The rate is generally based on a premium to the 3-month Government of Canada treasury bill rate. Together, floating/variable rate and convertible preferred shares represent less than 3% of the Canadian preferred share market.

4. Convertible preferred shares

A convertible security can be converted into another class of securities of the issuer. For example, a convertible preferred share may be convertible into common shares of the company that issued the shares.

Preferred shares Indexes for Canadian investors

The S&P/TSX Preferred Share Index is currently 57% financials, 20% energy and 12% utilities. Communication services, real estate, and consumer staples makes up the remainder of the market. The financials are tilted slightly more towards banks than insurance companies.

The current distribution yield of the S&P/TSX Preferred Share Index is about 6.1%. This is the dividend income an investor might anticipate over the coming year. The trailing 12-month yield is about 5.9%. These are attractive rates, Mario, but you can earn comparable rates in guaranteed investment certificates (GICs) with no risk or volatility. So, the high yields need to be put into perspective.

What to do with preferred shares at a loss

One consideration, Mario, is if you own your preferred shares in a taxable non-registered account, you could sell them to trigger a loss, if you have other investments that you have sold or intend to sell for a capital gain.

“Tax loss selling” is when you sell an investment for a loss to harvest the tax benefit of that loss. You can claim capital losses against capital gains in the current year. If you have a net capital loss for all investments sold in your taxable accounts in a given year, you can carry that loss back to offset capital gains income you paid tax on in the previous three years. Or you can carry the loss forward to use in the future against capital gains.

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