Page 196 - A Canuck's Guide to Financial Literacy 2020

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Convertible Preferred Shares

Convertible preferred shares give the shareholder the option of converting it to common
stock after a set date or on a specific date. These types of preferred shares are attractive to
investors because the security that the fixed income dividend provides and the opportunity
to gain from a rise in the share price.

Advantages of Preferred Shares

▪ Preferential Capital Structure

Preferred shares rank higher than common shares on a company’s balance sheet.
Dividends on preferred shares have to be paid before common shareholders. This
structure gives preferred shareholders a peace of mind.

▪ Known Dividend Rate

Unlike common stock that could experience a dividend cut, the dividends on preferred
stock are determined when shares are issued. Certain preferred shares have
cumulative features where any missed dividends accrue and must be paid on the next
dividend date. Holders of preferred shares must receive their dividends before
common shareholders.

▪ Tax Efficiency

Dividends from preferred shares have preferential tax treatment when compared to
bonds. Bond interest is taxed at an investor’s full marginal tax rate but income from
Canadian preferred shares is treated more favorably during tax time, thanks to
the Dividend Tax Credit.

▪ Low Volatility

In normal market conditions, preferred shares tend to be less volatile than common
stock but do have a higher volatility than bonds. An investor might find that preferred
shares provide a more attractive risk/return profile compared to other fixed income
securities.