Exploring Preferred Shares
A couple of years ago, I talked about preferred shares. At the conclusion of that post, I had said:
You’d have to be fairly certain that the central bank is no longer raising rates.
Are we reasonably sure that the central bank is no longer raising rates? Seems like it, right?
In one of the groups I follow, a gentleman does some pretty deep research into preferred shares. He lays out the best and worst case scenarios in great detail and seems to understand the various complexities of preferred compared to other investments like stocks and bonds.
Preferred shares are not bonds. They are equity. But usually, they are equity that does not get to participate in the upside of the underlying business directly.
They pay a dividend, but the dividend can be reset based on various factors, such as annually or on a specific date in the future and the prevailing government interest rate. Many preferreds can be “recalled” by the issuer at a set stock price. Because they are preferred, the dividend cannot be cut on a whim, unlike common stock dividends.
Because of the complexity, some investors shy away from them. And again, they are not typically going to go up and down as much as the common shares.
I had some cash in one of my accounts, and some money in money market funds. I noticed a few preferred shares were paying 10-14% dividends, and I thought it would be a good play to invest some money into them. I bought some. As well, I increased my investment in VVR – Invesco Senior Income Trust.
Additionally, I sold SCHD.
This further reduces my cash holdings, increases my “bond” holdings, and could potentially lead to some pretty big returns when interest rates start falling a year from now.
My current investment mix is as follows:
- Index Funds – 47.1% (goal 50%)
- Individual Stocks – 3.8% (goal 5%)
- High Div ETFs – 19.4% (goal 25%)
- Bond ETFs – 11.5% (goal 10%)
- Cash/Money Markets – 18.2% (goal 15%)
That’s pretty on target!
