What to do about bonds and preferred shares now

Every month the Money Reporter, the newsletter for investors whose interest is more interest,   publishes its list of recommended bonds and preferred shares. This month the Money Reporter names two BBB corporate bonds that would fit well in a laddered GIC portfolio.

What to do about bonds now

Bonds_and_Preferred_SharesCanadian bond prices have declined since the Bank of Canada raised the target for its overnight rate on September 6. Consequently, yields have risen. In the case of a 10-year Government of Canada bond, the yield, which was 1.93 per cent on September 6, is now 2.11 per cent. Year-to-date, the Universe Bond Index is up 0.5 per cent, with the government bond index up 0.1 per cent, and the corporate index up 1.5 per cent.

We continue to believe the long-term direction for bond yields is up. But the increase will likely take time, as inflation seems like it’s under control for now. Then too, bonds have benefitted from their safe-haven appeal over the years, and that should continue over periods of particular uncertainty.

Two corporate bond issues stand out among our recommended bond list this issue. H&R REIT yields 3.22 per cent and matures in about four years. Fairfax Financial yields 3.45 per cent and matures in about five years. We feel both would fit well into a laddered GIC portfolio.

What to do about preferred shares now

Preferred shares have handily outperformed bonds and equities this year. The S&P/TSX Preferred Share Index has gained 8.2 per cent since the beginning of the year. Much of this gain can be attributed to rising interest rates, which have ignited interest in the rate-reset part of the preferred share market.

Our floating-rate preferred shares have performed particularly well since we last updated our preferred shares table in our September 15 issue. They’re up an average 2.1 per cent in price since then. Our three straight fixed perpetual preferreds, however, have suffered a price loss of 0.7 per cent. All six of our floaters have raised their dividend since our September 15 issue.

Despite their strong performance and the rise in bond yields this year, we believe preferred shares are still attractive. Their yields remain very competitive compared to those of bonds. Continue to emphasize floaters over fixed-dividend payers. Hold five to 10 per cent of your overall portfolio in preferreds.

This is an edited version of an article that was originally published for subscribers in the October 20, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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