What to do about Canadian bonds and preferred shares

Every month the Money Reporter publishes a comprehensive list of best Canadian corporate bonds, Canadian federal and provincial government bonds and Canadian preferred shares─both straight and floating rate─that it recommends for the portfolios of income oriented investors.

What to do about bonds now

As the bond market progresses through the rest of 2015, we will continue to monitor the potential for interest rate increases. Yes, we’ve been saying that for a long time now, but the time is ever nearer. And administered rates such as the Bank Rate don’t need to actually move up in order to negatively affect bond prices: merely the anticipation of an increase that will take place later can affect bond prices now.

Our standing advice on fixed-return investments is to spread your money out among terms of one, two, three, four and five years. When your one-year term matures, your five-year bond will have only four years left to maturity. So you can invest in a new five-year term, at prevailing rates. Bonds are a source of predictable income. If you want capital gains, buy stocks, or mutual funds that invest in stocks.

We also recommend you maintain about a 55/45 split between corporate bonds and government bonds, in favor of the former. Because of the higher yields they offer, corporate issues tend to be less sensitive to interest-rate movements than government issues.

The Money Reporter monitors 12 best corporate bonds and a convertible debenture that it recommends for an income investing portfolio. It also recommends 19 Government of Canada bonds and 19 Canadian provincial bonds that are most suitable for fixed income investors.  

What to do about preferred shares now

With no change in our fixed-income allocation recommendation, and yields as low as they are today, it is worth considering the use of Canadian preferred shares to make up part of the corporate portion of that allocation. You can gain incremental yield by doing so, and the dividend tax credit is an additional bonus.

For example, our straight preferreds currently yield an average of 5.20 per cent, which the dividend tax credit makes even higher on an interest-equivalent basis. Compare that to the rates on the corporate bonds we recommend and you will see how much better that 5.20-per-cent-plus is.

We recommend straight preferreds right now over floating rate preferreds because of the current flat/low rate environment, but also because they yield better. As we said, our straight preferreds have an average yield of 5.20 per cent right now, compared with 3.42 per cent on average for our floaters.

Preferred shares are best held outside of a registered plan, if your plans are already full, in order to gain the advantage of the dividend tax credit.

The Money Reporter monitors 15 Canadian preferred shares that it recommends for an income portfolio.

 

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