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

Bonds and Preferred SharesBonds have begun the year under pressure. The FTSE TMX Canadian Universe Bond Index is down 1.4 per cent since the beginning of January. As with last year, corporate bonds have outperformed, losing 0.8 per cent year to date, compared with a 1.6-per-cent loss for government bonds.

Rising interest rates have turned investors away from bonds, because their prices fall as rates increase. But in the recent stock-market decline, money flowed into North American government bonds. If further stock-market declines continue, then, we could see more periods of support for bonds.

Over time, however, bond yields should continue to move higher. Consequently, the capital loss caused by rising yields will, in many cases, likely offset income from coupon payments. That’s not such a concern if you plan to hold bonds until maturity. In that case, you’ll know exactly what interest and principle you’ll receive, and you can plan your income needs accordingly. Such planning is made easier by the higher yields the bond market is now offering.

What to do about preferred shares

While equities and bonds have lost ground so far in 2018, preferred shares have bucked the trend. The S&P/TSX Preferred Share index is now up 0.4 per cent year to date.

Our floating-rate preferreds have performed very well since our December 15 issue, when we last updated our preferred share table. Our floaters are up 9.6 per cent since then.

By contrast, our three straight perpetual preferreds that pay a fixed dividend are down 0.4 per cent.

Our floaters have continued to benefit from rising interest rates. Since our last preferred update, the Bank of Canada has raised its overnight rate to 1.25 per cent from 1.00 per cent. The big banks responded to this by raising their prime rates by 25 basis points to 4.50 per cent. Consequently, our floaters have either raised, or will soon raise, their dividends.

We continue to believe the tail winds favour floaters in 2018. The overnight rate will likely continue to rise, triggering more dividend increases.

This is an edited version of an article that was originally published for subscribers in the February 16, 2018, 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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