Why are rate resets down so much this year? One reason is falling dividends. Similar to common stocks that come under selling pressure when they slash their dividends, preferred shares also get hit. So far in 2015, over $1.9 billion worth of rate reset preferreds have cut their dividends between 30% and 53%.
The latest example came on July 16th, when Emera announced their Series A dividend yield would fall to 2.555% from 4.40%. Dividend cuts like this help explain why holders of EMA.PR.A shares are down 28.5% this year and why the S&P/TSX Laddered Preferred Share Index is down 14.5% in 2015 (to June 30th).
These cuts have impacted the dividend yields of passively managed funds and ETFs. For example, the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) just cut its dividend for the second time in the last 12 months. The dividend on the ZPR was reduced by 6% on June 18th and has now dropped by 11.5% since June 2014. Furthermore, with another $1 Billion in rate resets rolling over by the end of this year it is unlikely that all the dividend cuts are behind them.
With active and professional management, dividend cuts can be anticipated and avoided. So far in 2015, the NexGen Preferred Share Fund has not had any of its holdings cut their dividends and has seen its portfolio’s yield rise to over 5.1%. This is very compelling when compared to bonds yielding 1.96%, common stocks yielding 2.93%, and the ZPR yielding around 4.7%.
Jeff, Dax, and Ian
*All yield data is as of June 30th, 2015. The bond yield is calculated using the FTSE TMX Canada Universe Bond Index yield and the common stock yield is calculated using the S&P/TSX Composite Index.
All data is as of June 30, 2015. Performance for the NexGen Canadian Preferred Share Tax Managed Fund Capital Gains Class Front End Load Regular Series is as follows: 1 month: -3.1%; 3 months: -3.9%; 6 months: -3.7%; 1 year: -1.1%; and Since Inception: 3.5%. Performance for the NexGen Canadian Preferred Share Registered Fund Front-End Load is as follows: 1 month: -3.1%; 3 months: -3.7%; 6 months: -3.5%; 1 year: -0.8%; and Since Inception: 3.6%.
Inception date: August 13, 2013.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rate of return is the historical annual compounded total return including changes in share value and reinvestment of all dividends or distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.