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Bond investing and preferred shares

Every month the Money Reporter publishes its list of recommended bonds and preferred shares. In February it recommended 38 government bonds, 13 corporate bonds and 15 preferred shares suitable for current buying.

What to do about bonds now

Canadian bonds have gotten off to a relatively good start for the year, gaining ground while equities have done poorly. The FTSE TMX Universe Bond Index has gained 1.4 per cent since the beginning of January. As with last year, government bonds continue to lead the way, with the All-Government Index up 1.6 per cent. Investors have adopted a “risk-off” stance in light of concerns about global economic growth and volatile oil prices. Hence, the demand for government bonds has been high.

Corporate bonds, meanwhile, have continued to underperform, with the All-Corporate Index up just 0.7 per cent since the beginning of the year.

But with inflation currently running at about 1.6 per cent, we find that some corporate bonds offer relatively attractive value now, such as the Enbridge Income Fund bond.

We continue to recommend a 40-per-cent weighting to fixed income in balanced portfolios right now. You can beef up your return by tilting your bond portfolio to corporates including some preferreds.

What to do about preferred shares now

The story on preferred shares sounds like a broken record. The S&P/TSX Preferred Share Index has continued to slump in 2016, down 12.2 per cent since the beginning of the year. Concerns about low interest rates continue to weigh heavily on rate-reset preferreds, which make up most of the index.

But we think the selling has been overdone. Many preferred-share issues offer compelling value now. With the 5-year Government of Canada bond yielding 0.52 per cent, our preferred-share recommendations yield from just over three per cent to nearly eight per cent. Remember, too, that the dividend tax credit lets you keep more of your income on an after-tax basis than bond income does.

We continue to recommend you place up to five per cent of your total investment portfolio in preferred shares if you can tolerate their higher risk.

Because of interest-rate uncertainty, we still recommend holding more straight perpetual preferreds than floating-rate or fixed-floating preferreds right now.

 

Money Reporter [1], MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846