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.

What to do about bonds now

After falling from late September, early October to mid-December, Canadian bond prices rebounded in late December and moved mostly sideways in January. Still, on a year-to-date basis, the FTSE TMX Canadian Universe Bond Index is up by 0.38 per cent. Corporate bonds have outperformed government issues, gaining 0.84 per cent. Government bonds have gained 0.20 per cent.

Despite the rebound in bond prices, the longer-term outlook for bonds is lacklustre. A decent economic outlook, which includes rising inflation, suggests equities will continue to outperform bonds. We, therefore, recommend you tilt your asset mix to stocks. As yields gradually rise over time, a larger bond weighting might be justified.

A balanced investor, then, might want to keep 60 per cent in equities and 40 per cent in cash and fixed income. Keep maturities on the short side to reduce interest-rate risk. A laddered GIC portfolio that includes a corporate bond, is a good way to maximize yield.

What to do about preferred shares now

Canadian preferred shares have started the year on a strong note, outperforming not only the bond index but also the Canadian stock market. The S&P/TSX Preferred Share Index is up 4.3 per cent year to date. Investors have turned their attention to preferreds in their search for higher yields at a time when new supply is limited.

We include preferred shares as part of your fixed-income allocation, as a potential tax-efficient substitute for corporate bonds. If you can use the dividend tax credit, i.e., you’re investing in fixed income outside of a registered plan such as an RRSP, then you might choose preferreds instead of bonds.

Just don’t consider preferreds as a separate asset class from bonds, or you might end up over-invested in them.

Within your preferred holdings, we continue to recommend you overweight straight-fixed preferreds relative to floating-rate preferreds. That’s because the Bank of Canada will likely keep interest rates low for awhile yet.

 

This is an edited version of an article that was originally published for subscribers in the February 17, 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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