Page 195 - A Canuck's Guide to Financial Literacy 2020

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Rate Resets Preferred Shares

Rate Resets Preferred Shares are one of the most popular shares in the Canadian
preferred shares market. Over 50% of preferred shares are rate resets. These pay a fixed
dividend rate until their reset date. The reset date is typically every 5 years.

When the reset date comes around, the issuer has the option to call the shares. If the
shares are not called back by the issuer, a new a dividend rate will be locked in.

This fixed rate is usually based on the 5-year Government of Canada rates plus a premium.
If an investor is not comfortable with a fixed rate, they can opt for a floating rate coupon.

These types of preferred shares are popular as the investor has a predictable source of
income.

Floating Rate Preferred Shares

Floating rate preferred shares pay a dividend where the rate is tied to a reference rate,
usually Bank of Canada’s prime rate or Government of Canada’s 90 Day bond yield. The
dividend payment would be adjusted at each payment date based on the reference rate.
These types of preferred shares also have a minimum dividend rate that investors might
find attractive.

Perpetual Preferred Shares

Perpetual preferred shares pay a fixed dividend for as long as they’re in issuance. These
types of shares have no maturity date but have a call date. The issuer can redeem or “call”
these shares on or after the call date. When it comes to their duration, they’re similar to
corporate bonds which is roughly 25+ years. However, the duration for banks are medium
term in nature, 10 years.

Cumulative Preferred Shares

These types of preferred shares have a fixed cumulative dividend feature and paid out if or
when declared by the Board of Directors. If no dividend is paid out in the quarter, the
dividends accrue or accumulate to be paid in the next quarter.

Retractable Preferred Shares

Retractable preferred shares pay a fixed dividend. These types of preferred shares force
the issuer to redeem the shares at par value on a specific date, if the holders opts to. There
are two types of retractable shares. One forces the issuer to redeem the shares for cash
and the other forces the issuer to redeem the shares in common shares.