Equitable Group 6.35% Pref Share | General financial discussion | Discussion forum

You don't need a dividend tax credit for TFSA as it's never taxed.

We will have to see what the market thinks once they start trading. All the IPO prefs issued by the banks, lifecos and pipelines/utilities have been selling very quickly this year. Investors looking for yield. That said, they find a trading range commensurate with risk perception. I suspect they will trade above part given Equitable is a bank.

I have not looked at the prospectus but I suspect these prefs are NVCC compliant due to Equitable being a Schedule 1 bank. Investors should know that OSFI could force conversion of NVCC compliant issues into common equity in event of bank failure. IOW, shareholders take first risk to mitigate risks of taxpayer bailouts. That said, it seems investors have not disounted for conversion risk in any of the big 5-6 pref offerings this year.

Details here
http://phx.corporate-ir.net/ph.....highlight=

I must admit to some confusion regarding the rate.
First, I don't understand the jargon, so would have had no idea what non-cumulative meant, but it does sound like they might not pay during a downturn. I understand that some of the big banks had to cut their dividends in the last downturn, although they bounced back.
According to what is written in their announcement, could Equitable, if necessary, reduce their dividend and then put it back up again later, or would the only option be to actually miss one or more dividend payments entirely? Is this dividend structured any differently than the majority of preferred share dividends?
What is the point of announcing a rate, for 5 years no less, plus establishing a formula for a rate even beyond that, and promoting the product on that basis, if there is no obligation to pay it? I don't get it.
I was under the impression that dividend rates were normally set from time to time in response to the success of the company. Is that not true?

I have been in the preferred share market for some time. As said upthread, http://www.prefblog.com/ and http://www.prefinfo.com/ are excellent sources for preferred shares. James Hymas does an extremely good public service with his blog. There are way too many moving parts to preferreds for anyone here to cover the subject adequately.

Preferred shares are of many types. The most common are perpetuals, callable only by the issuer, and there are various types... those with a permanent dividend rate (forever) and Fixed Reset where the dividend rate typically can change every 5 years (an initial 5-6 year period upon issue) and then subsequent 5 year periods where the dividend rate is set at GOC5 (Gov't of Canada 5 year bond) + X basis points. The X is set at time of IPO and is usually about the Initial Period yield less the current GOC5). Example: If the Initial Period dividend rate is 5.25% and the GOC5 is currently 2.65%, then the X is usually about 260 bp. What the Initial Period dividend rate is.... depends on the issuer's credit worthiness and what the underwriters insist is necessary to market the issue without them getting burned in a bought deal. Fixed Resets are the most common type of issue now because investors know that government bond rates are more likely to go up than down in the future.

Preferred pricing acts much like corporate bonds. Prices go down (below par of $25) if perceptions of forward interest rates go up and/or credit worthiness of issuers decreases. The reason to buy a Cdn corporate preferred over a bond is the eligibilt dividend tax credit in taxable accounts... and since I have no RRSP room to speak of, most of my 'pseudo fixed income' is in my taxable account and thus the reason for preferreds.

The issue of non-cumulative versus cumulative means that if an issuer misses a dividend payment, then there is no obligation to make that up in non-cumulative whereas the issuer must make it up when the issuer calls the cumulative preferred share. It is not as discussed above that the investor is at the whim of the Board with respect to dividend payments on non-cumulative prefs. The preferred share has higher seniority than common shares and the dividends must be paid on prefs before any dividend is paid on common shares. Likewise in a windup, secured bond holders are paid out first, then preferred shareholders, with common equity shareholders figting it out with unsecured creditors.

There are some preferred shares issued as non-cumulative and some issued as cumulative. The latter is always better but with high creditworthy firms, investors do not seem perplexed with non-cumulative preferred shares. I do not make a distinction on non-cum versus cum BUT then I do not buy non-investment grade prefs (would not buy TransAlta for example nor have I bought PPL (Pembina) nor ALA (AltaGas) prefs). Imagine that - credit rating agencies do not consider Pembina Pipeline nor AltaGas as investment grade. Imagine what they think of the common shares!

Bottom line: I can buy Enbridge or Fortis or TransCanada or Canadian Utilities preferreds at similar yields to Pembina and AltaGas so I can ignore the latter. TransAlta prefs trade at a discount today because the company is considered a credit risk -- just as their corporate bonds would be.

Prefs are not for everyone. They are priced like bonds but also are susceptible to steep price discounting due to credit worthiness. All prefs took pricing hits back in 2008 and 2009 during the financial crisis. They fit a niche in one's portfolio and need much study and learning before investing in same.l

Please note the following is for information purposes only and is not a recommendation or solicitation with respect to investing and securities. Please do proper due diligence before making investments, and seek counsel with a qualified financial professional if you cannot do this due diligence on your own.

There are a few things I would like to point out:

1) The Equitable Group (holding company) is not the same as Equitable Life. The Equitable Bank is a niche mortgage lending company (former trust company), while Equitable Life is a life insurance company. Equitable Life is one of the few remaining mutual companies in Canada which means that the company is owned by its policy holders, and not shareholders. I am fortunate enough to be old enough to remember this as most insurance companies demutualized in the 1990’s (I am 29).
2) The Equitable Group and Equitable Bank have a BBB and BBB(low) ratings by DBRS. This was confirmed by DBRS on June 26, 2014. The report was released July 8, 2014.
3) There are many different provisions, especially, for preferred shares. Different series have different provisions and reset rates/prices. For example, GWO.PR.H and GWO.PR.N are very different. Read the prospectus carefully. Different risks exist as well (call risk, reset risk, and etc.).
4) Preferred shares and common shares have their place in portfolios depending on the clients’ investment objectives. One isn't "better" than the other, and one could be favorable than another depending on market conditions.

I am definitely the amateur here. I like to learn more, but, realistically, it is beyond me to make an intelligent decision to invest in this type of product right now, so I will pass.

I can't remember which banks took the hit in the last turndown, but I did read that some of them did.

I do try to read things that will help to educate me, but the more I read, the more complicated I realize it all is, and not a game for amateurs. On the other hand, I'm not willing to fork over 1% or 2% of assets to get professional advice from someone I really don't know which offers no guarantees in such a low-return environment.

In one of the books I read, they suggested that buying dividend-producing shares (in sound companies, of course) was a good idea for people in retirement who need a steady income stream because the dividends will be more likely to hold up even when companies and markets go through rough spots. They said that the companies would rather have the stock price fluctuate than the dividend because people are more likely to sell their shares if they are not getting their dividends than if the price goes down. As long as the company is returning dividends, the idea was that people were more likely to hang on, creating the stability needed for the company to recover, thus improving the odds that they would indeed recover, and making them inherently more stable.
This may be common wisdom to everyone else, but it seems to me that it might impact the decision about buying, so I thought I'd throw it in for the sake of people who might be reading this and who know even less than I do.

AltaRed, do you think, then, that common shares are easier to understand? I notice you said you invest in both of them.
Do you think one needs an "advisor" to sort this stuff out or can one learn about it somewhere in a systematic way?

Thanks for the ideas, AltaRed. As you say, it all takes time, although I am interested in the subject. When I was a kid in the 1950s or so, there was a board game called Stock Trader, and it was my favourite game, although I no longer remember how it worked. Does anyone remember it?

I have been fascinated by the Couch Potato strategy although have not dipped my feet in. I am more attracted to the idea of being in control of the specific investments, but it may be more than I can handle.