Preferred Stock
Preferreds Rob Carrick’s Saturday January 21 2012 column in the Report on Business was about preferred stock. Many consider preferreds the next step up from GICs and bonds. I don’t. People do not buy preferreds: they are lodged in portfolios by a broker if the client expresses any interest in income and concern about market fluctuations. The warm and cozy sweet talk people get about preferreds will mention their higher yield, tax-advantaged income and relatively stable price. They sound preferred, but they are not. I reviewed a portfolio last week for a friend and it had 34.8% in preferreds in addition to 30.5% in fixed income. There is little chance for wealth creation with that portfolio. If income does not grow, and preferred dividends do not grow, there can be no meaningful capital growth. ♣ Actually, I read Carrick’s column about preferred on January 22 2012 in Wakefield, Quebec. My first cousin, once removed, an investment banker from Toronto, was sleeping in the next room. We were up to Wakefield for his dad's 70th birthday. First thing I asked, when I saw him that morning was “Do your guys do preferred deals too?” They do. “And are preferreds still mostly peddled retail? They are. That sums it up. The real money in finance is made in investment banking. Once completed, the ‘paper’, whether it be preferreds, mortgage-backeds (as in the film Margin Call) or IPOs is passed along to the sales network. That means brokers, if it is retail rather than institutional. They stuff the stuff into portfolios all over the country. Not having a broker avoid this type of manoeuvre. I see this as an advantage. Brokers exist to peddle the ‘paper’ created by their investment bankers. Preferred are not mentioned in Jarislowsky’s The Investment Zoo. That is as telling as in Nelson Mandela refusing to meet George W. Bush when Bush was in South Africa. The Investment Zoo should be your finance bible.