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What to do about bonds and preferred shares now

Every month the Money Reporter [1], the newsletter for investors whose interest is more interest, publishes its list of recommended bonds and preferred shares. Maintain short durations for your bond holdings and favour floating rate over straight fixed preferreds.

What to do about bonds now

It’s times like these, with equity markets down since the beginning of the year, that we appreciate how much we have allocated to the fixed-income section of our portfolio. Mind you, the FTSE TMX Canadian Universe Bond Index is down 0.8 per cent year to date. But this retreat is not as bad as the one that has occurred on the S&P/TSX Composite Index, which is down 4.1 per cent over the same period.

Short-term bonds, however, have held up comparatively well. The short-term bond index has returned 0.1 per cent since the beginning of the year.

The mid-term and long-term indexes, though, are both down—indicating higher expected interest rates over those terms—with the biggest decrease occurring in the long term index—down 2.2 per cent versus a 0.7-per-cent loss for the mid-term index.

This simply reinforces our view that you should maintain short durations for your bond holdings by transitioning into higher coupon shorter maturities. We continue to recommend a 40-per-cent allocation to cash and fixed income in a balanced portfolio.

What to do about preferred shares now

Our floating rate preferred selections—the type of preferreds we have been recommending for some time now—have continued to do well despite the recent market turmoil. Since our January 5 issue, the six floaters have risen an average 16.0 per cent. The gains range from a low of 4.3 per cent for Power Corp. (TSX—POW.PR.F) up to a high of 27.7 per cent for Power Financial (TSX—PWF.PR.A). Those are healthy gains, and a good reminder that income investors need diversification away from equities at all times. Sometimes the return on preferreds isn’t all that high, but right now, if you own floaters, you probably appreciate whatever allocation you have to them.

Since our January 5 issue, our three straight fixed preferreds have declined an average 3.9 per cent. We still maintain a preference for floating-rate issues over straight fixed preferreds as a group right now. Nonetheless, we do recommend adding some money to our three straight fixed preferreds as they yield over 5.00 per cent, which is a competitive rate. Direct more money, however, to our floaters.

This is an edited version of an article that was originally published for subscribers in the March 16, 2018, issue of Money Reporter [1]. You can profit from the award-winning advice subscribers receive regularly in Money Reporter. [1]

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