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Discussion Starter #1
Great West Health has an IPO out for perpetual (non-cumulative) preferred shares.
Following is some relevant info:

5.80% per annum, payable quarterly on a non-cumulative basis on the last day of March, June, September, and December in each year. The initial dividend will be paid on June 30, 2010 and will be $0.46877 per Preferred Share based on an anticipated closing date of March 4, 2010.

Redemption for Cash:

The Preferred Shares are not redeemable prior to March 31, 2015. On or after March 31, 2015, the Corporation may, on not less than 30 nor more than 60 days' notice, redeem the Preferred Shares in whole or in part, at the Corporation's option, by the payment in cash of $26.00 per Preferred Share if redeemed prior to March 31, 2016, at $25.75 per Preferred Share if redeemed on or after March 31, 2016 but prior to March 31, 2017, at $25.50 if redeemed on or after March 31, 2017 but prior to March 31, 2018, at $25.25 if redeemed on or after March 31, 2018 but prior to March 31, 2019 and at $25.00 per Preferred Share if redeemed on or after March 31, 2019, in each case together with all declared and unpaid dividends up to but excluding the date fixed for redemption.


Unlike most of the recent preferred shares issues by banks/insurance companies, this is not one of those rate reset issues based on a benchmark GoC bond rate.
Appears to be a straight 5.8% coupon rate.

I'm considering this as an addition to my dividend portfolio.
Based purely on this info (detailed prospectus not available yet), is there any reason not to buy.
There's of course interest rate risk and the related risk of capital loss at the time of sale.
We may also assume that the shares will not be redeemed by GWH as per the specified schedule, since interest rates are headed higher and the corporate spread is probably going to narrow once the economy settles over the next couple of years.
So one risk (obvious) is being stuck with a 5.8% rate or having to sell at a loss.

However, other than that, I don't see any other red flags.
I don't like those rate reset perpetual prefs, so this one is appealing.

Any thoughts?

Thanks,
Harold
 

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Any thoughts?
Yup. It's expensive versus comparables from the same issuer that are currently YTW in excess of 6%. If you must have this issue, buy it after it closes once it begins to trade.
 

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Well, my own preference is for fixed expiries, cumulative dividends, and a retraction feature doesn't hurt, but those are an endangered species. I don't much like the rate-reset variety, either, at first blush, though I haven't really studied them all that closely.

I know nothing about the particular issue you're referring to ... how does its rate compare to other series from the same issuer? ... is this an IPO? ... are the issuer's other series trading at discount or premium?

oops, I see scott has already answered that last question.
 

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Discussion Starter #4
OK, thanks, I guess there is general consensus that this is no big deal.
I'll wait and see what happens after this starts trading.
OTOH, at 5% yield, the CPD is starting to look more and more attractive.
Maybe I'll stop researching individual prefferds and just get the CPD.
 

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harold you're too young for these little old lady pfds imho.

for dividends, what about crescent point. Current yield is 7% or better.

cpg may be canada's favourite energy play. There's not an analyst with a negative word about cpg, save and except that some say it's fully priced. However i side with those who hold that the company's acquisition strategy plus its smart management team with expertise in horizontal well drilling and shale fracturing are likely to grow CPG much further.

if you want to push your operating return up a notch, you could sell otm calls. I do this. Have never been assigned. Total return on current price would approach 10%. For me it's much higher, because i began buying this gem nearly 2 years ago when it was in the low 20s. I'm still buying cpg on dips.
 

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Discussion Starter #7
harold you're too young for these little old lady pfds imho.

for dividends, what about crescent point. Current yield is 7% or better.
The CPD (or individual pref) is targetted for an RESP.
Jr. is 3, so a 15 - 20 yr. horizon.
I was considering the pref. as a stable, fixed income component within the RESP portfolio.
I'll look into CPG - thanks for the tip, HP.
 

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The 'risk' as stated by Harold Crump on preferreds: 'So one risk (obvious) is being stuck with a 5.8% rate or having to sell at a loss.'

Then noted by Humble Pie - that corporate dividends can also provide a tax efficient income flow.

I then read Tom Connolly discussing both - 'The yield, while higher initially, is fixed. If you expect to live a few more years, why would you want a fixed income when you can have a growing income from common stock dividends? With common stock you start off with a lower yield, but the dividend and your capital can grow.'

I don't think Manulife had cut their dividend when Tom Connolly wrote that. :D

But it made me think about why someone would buy one over the other. As the preferred (perpetual) shares offer the locked in income stream, the common shares for the potential dividend increase or income increase (the risk being the potential loss or dividend cut).

However some people may feel the real risk is locking in at a certain rate, as opposed to the risk of a dividend cut.

Both are tax advantageous.

And as mentioned above, there are many reasons to buy either, depending upon age, purpose (RESP, RRSP, non registered account) to consider too.
 

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One thing to note about preferred's is that they act like bonds in that they are interest rate sensitive. However, when I did some research on putting together an income ETF portfolio, I found CPD to be an attractive way to get preferred (and yield) exposure.
 

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the only time in my life when i have ever bought boring old preferreds was about a year ago when a couple t-bills matured but there was no t-bill yield.

i really don't like preferreds. I bought 2, one a convertible on a western canadian bank that soared in price, so i've recently sold. The other one is a bombardier pfd yielding just north of 7% when i bought it. It has come down in price recently but is still healthily above what i paid for it. My plan is to sell if & when it descends to my purchase price, but this is the lazy investor talking. I just want to spare myself the work of finding another candidate, for the time being, if i can. In the meantime a 7% return with full dividend tax credit, in the defensive compartment of portfolio, is fine w me.

if i would sell the bbd pfd i would not be buying another preferred at this point in time.
 
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