Buy preferred shares to boost bond yields

With our current recommendation of a 40-per-cent allocation to fixed income, and 55 per cent of that in corporates, it is worth considering using some preferred shares to boost the yield on the corporate portion of this allocation.
 
What to do about bonds now

After generally gaining ground in January and the early part of February, Canadian bonds retreated for the remainder of February, though they have made back some of the lost ground in March. Consequently, the year-to-date gains for bonds are less robust than they were when we last reported on them in February.

At that time, bonds had gained 1.4 per cent for the year. As it stands now, the year-to-date gain has fallen to 0.9 per cent.

The ground that bonds have given back over the past month or so reflects a more “risk-on” attitude by investors, as the S&P/TSX Composite Index has gained about 11 per cent from its February lows. And so far in March, this seems to be confirmed by the Canadian bond market itself, with corporate issues (up 0.44%) outperforming governments (up 0.33%).

For balanced portfolios, we recommend a 40-per-cent weighting in fixed income right now, as interest rates remain low. This could persist for awhile, but they should eventually head higher.

What to do about preferred shares now

Preferred shares strengthened this past month, whether it was in our floaters or straight preferreds. Our straight preferred shares were up in price this past month by an average of 2.1 per cent, after having fallen an average of 1.8 per cent in the two months prior to that. Their average yield is now is now 6.09 per cent, down from 6.22 per cent last month. Only the BCE issue showed a loss.

Five of our six floating-rate preferred shares selections rose, for an average price increase of 2.0 per cent, putting their average yield at 4.47 per cent, down from 4.59 per cent four weeks ago.

Because the dividends paid by floaters are unlikely to rise anytime soon, we still recommend holding more straight preferreds than floaters, or fixed-floaters for that matter.

With a current recommendation of a 40-per-cent allocation to fixed income, and 55 per cent of that in corporates, it is worth considering using some preferred shares to boost the yield on the latter portion of this allocation.

 

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