Steve & his squeeze have managed turn $100,000 in net worth into one million. The household income is $200k, and they own real estate with a mortgage equal to one year’s earnings. That will be offed in six years.
How’d they do it?
Two things. First, real estate: “This was mainly possible as a result of our move from Vancouver to the North Okanagan. We were able to buy a new-build 4 bedroom townhome for less than $400k three years ago,” he says. It’s amazing what happens when you liberate yourself from the land of $2 million crap houses.
Second, they learned how to invest: “I started off recklessly investing in individual stocks and over the years have adopted your balanced and diversified portfolio advice. We skew a little more aggressively with a 70% equity / 30% fixed mix. Our plan is to continue saving, investing and reach our goal of $2 million in the next decade. That would allow us both to considerably reduce our working hours and make more time available for our outdoor pursuits/family.”
BTW, here’s the MSU: “Long time reader of your daily blog. I love the combination of humour, sarcasm and advice. Thank you and your team’s ongoing contributions. The fact that your blog is completely ad free is a breath of fresh air.”
Okay, but there’s a problem. Preferred shares. Like many who come to moan about lost capital value on prefs as interest rates dropped, Steve has trouble staying in an asset class that’s plopped. His question:
“Going forward, is it reasonable to expect a rebound in preferred shares if interest rates stabilize or increase? Or is it more likely that long-term low interest rate environment makes this asset class one to avoid. I do believe you said you own preferreds because they provide diversification and a counter balance to other asset classes.”
If you didn’t know, preferreds are a hybrid between stocks and corporate bonds. Like stocks, they pay dividends, not interest. Good ETFs based on prefs hold a basket of securities from the best bluechip issuers such as banks, utilities and insurers. Like stocks they constitute an ownership position in those companies, but like bonds they’re considered fixed income, kicking out a regular stream of cash. These days that amounts to the better part of 5%. Sweet.
The Canadian pref market is dominated by ‘rate resets’ which adjust every few years based on the central bank rate. So when interest rates rise, so do preferred values – a nice offset to bonds, which drop when the cost of money increases. But despite the market price of preferreds, they’re mostly held for yield. A lot of people don’t understand this, since they think everything in their portfolio should go up in price. But that never happens in a fully-diversified account.
As mentioned, prefs pay dividends. Bonds (and GICs) pay interest. Big difference in tax treatment, thanks to the credit given dividend investors. For example, if a preferred share ETF pays you 5%, then a bond of GIC would have to produce 6.5% just to equal it. But both of those, as we know, deliver peanuts in comparison. Like I said, buy them for yield.
Now what about price? When interest rates rise, prefs do, too. But lately rates have plunged. Prefs have lost a quarter of their value along the way. So will that change?
Of course. The yield on government bonds has been pushed into the ditch by the Trump trade war, with the yield on a US 10-year Treasury cascading from 3.2% before Christmas to 1.5% now. Ditto in Canada. Prefrreds went for the ride, even though they continue to pump out that dividend. Yes, if Trump blows the world up and a recession ensues, yields could edge lower. But the odds of that happening are slim (to none). And eventually bond yields will restore. Prefs will track that – which means if you believe in buying low, take note. This is low, baby.
Hey, here’s my fancy portfolio manager buddy Ryan who dropped in to borrow my chamois. So, how would you answer Steve?
“I’ve been covering the Canadian preferred share market for over 15 years and without fail, bad years have been followed by strong years and I believe this time will be no different.” He says. “While my timing may be off, I believe strongly that bond yields will ultimately rise leading to a recovery in prefs.”
So what to do now?
“First, plug your nose and take your medicine. Prefs are out of favour but don’t let your emotions drive your investment decisions and sell after a 20% drop! Second, sit back and clip the 4-5% dividend yields while you wait for the recovery. Third, be proactive and take advantage of this drop by rebalancing your portfolio and adding to these current stinkers. That’s what I did last week in my own personal account. For clients we’re doing exactly this by beginning to trim our strong performing bond ETFs and adding to our preferred share ETF.”
As usual, R has a chart in his pants:
“Look at this chart. It’s a beauty and it perfectly illustrates why we’re doing this! The green line tracks the relative performance of Canadian prefs (CPD-T) to Canadian bonds (ZAG-T), overlaid with the US 10-year bond yield. Note how when government bond yields (in this case the US 10-year treasury yield) is rising prefs outperform bonds (rising green line). Conversely, when government bond yields decline, bonds outperform prefs (declining green line). So prefs in effect provide a hedge on our bonds, which have been doing great. Since I believe we’re close to the bottom in yields we’ve been taking advantage of the strength in bonds by trimming them and adding to the beaten up prefs. Will our timing be perfect (probably not), but we’re getting to extremes on government bond yields, and they ultimately will recover along with pref prices.”
So, let’s summarize: preferred shares deliver a steady, sexy cash flow equivalent to a 6.5% bond or GIC, thanks to the tax credit. They represent a stake in some of the best companies in the land, which will never flounder. There is zero credit risk. They’re destined to rise in value as interest rates move. Right now we’re at historic lows for rates and history tells us they’ll not remain. If you believe in buying low and selling high (instead selling low and moaning) here ya go. Low.
A balanced and diversified portfolio should have about 15% in unloved preferred shares. Seriously. Be a rebel.
93 comments ↓
RT: Buy your “De-fund the left-wing billion-dollar CBC” bumper sticker on eBay:
http://www.ebay.ca/itm/174004818249
So come again? 100k into 1 million in 3 years … not from investing in equities, probably made a ton off the north van house …….
The genius of exiting Van real estate – turn the paper profits into real money, and get a life. – Garth
I guess the irony of this post is the guy found financial stability from investing in a one asset real estate strategy and made off like a bandit. I need a scotch.
He’s smart enough to have exited that one-asset strategy, to diversify and drop risk. I think he understands (as do I) that there will be no repetition of the housing bubble. – Garth
ZAG has corporates and is longer than 5 years. Not sure why you didn’t chart CPD to ZAG or directly the 10 year bond yield but I get the negative correlation between bond prices and preferred stock. Not questioning the overall wisdom (the chart is reassuring), but the expectation of increased rates, which are lagging those in the market, and the explanation on price fluctuations is not complete. Note the loss in preferred stock prices along with stock and bonds late last year until the Fed relented. They do best when rates are stable.
Perpetuals don’t really rise much in value when rates rise.
Of course not. They don’t reset, and act like long-term bonds. – Garth
It appears Canada managed to export 450 billion worth of beaver pelts and maple syrup.
No mention of Tasmania/Australia exporting a Flop in 1999.
I’ll get over it…
M45BC
“Mapping International Trade: Who Are the Biggest Exporters?
Exports are a major aspect of international trade. Countries around the world can bolster their economies by selling their resources and consumer goods to other nations around the world. Developing and developed countries both export products around the globe.
But which countries lead the global economy in exports? We constructed a helpful visualization to find out which countries are the largest exporters in the world. You may be surprised at the results.
China is still, by far, the largest exporter in the world. The country exported a total of $2.5 trillion worth of goods in 2018.
The largest U.S. export industries include food and beverage, crude oil, civilian aircraft, auto parts, and industrial machines.
The United States and China are part of an ongoing trade war, which could significantly affect the world export industry.
Collectively, the European Union has the largest export industry — exporting $6.5 trillion worth of goods in 2018.
We gathered our data from the World Trade Organization, which tracks the total value of all the goods each country exports. Keep in mind that this data does not include services, only physical goods.
To make the map easier to read, we shaded each country based on the total value of their exports. Some countries that have minimal exports were excluded from our data
World’s Largest Exporters
1. China: $2.5 trillion
2. United States: $1.7 trillion
3. Germany: $1.6 trillion
4. Japan: $738 billion
5. Netherlands: $723 billion
World’s Smallest Exporters
1. Niue: $2 million
2. Northern Mariana Islands: $5 million
3. Montserrat: $6 million
4. Palau: $8 million
5. Saint Pierre and Miquelon: $8 million
Perhaps the most notable insight from this data is how much the global export industry is dominated by just a few countries. China is, by far, the largest exporter in the world, beating the United States by about $800 billion. China is, by far, the largest exporter in the world, beating the United States by about $800 billion. China’s top exports include machinery, technology, furniture, plastics, and vehicles. Furthermore, the top three countries combined (China, the United States, and Germany) exported more than the next seven countries combined.
Meanwhile, at the bottom of the list, countries like Niue and Palau are only exporting a few million dollars worth of goods per year. Lastly, it’s important to consider the potential impact of the U.S. and China trade war on the global economy. Not only do China and the U.S. stand to lose a lot from this trade war, but so could other countries that rely on these countries as their major trade partners”
https://howmuch.net/articles/the-worlds-biggest-exporters-2018
Hi Garth,
I have a question for you on the B&D portfolio. I think in prior posts, I’ve questioned why not just have a 100% equity portfolio for highest long-term returns. If you are perfectly comfortable with risk, you’d put your asset allocation into a 100 percent stock portfolio and keep it there until you die That’s the kind of asset that has produced the best returns over the longest period of time.
I think you’ve addressed this point by saying that most people don’t have the emotional/mental stability to NOT panic/sell during downturns with this type of portfolio.
My question is, would you recommend it to people that DO have emotional/mental stability? :) Why don’t you use this type of portfolio yourself, instead of the B&D? I think it works pretty well assuming your spend rate never exceeds 4% of your portfolio (works even in downturns). I’d rather have my money all in the asset class with the highest long-term return.
Look forward to your response,
Mr Fundamental
Me? I don’t need the volatility. Bandit already has enough liver treats. (I do not recommend 100% equities for anyone.) – Garth
Yes, let’s all stare in awe of the financial successes of a couple with annual incomes nearly triple the national household median.
#1 Gaetan Jones on 08.27.19 at 4:43 pm
RT: Buy your “De-fund the left-wing billion-dollar CBC” bumper sticker on eBay:
http://www.ebay.ca/itm/174004818249
_ _ _
Why? So one can advertise to the world how ignorant they are?
Scotia Bank…3.4% dividend increase. Rub tummy.
Love Canadian banks.
Flop: WTF is The Netherlands exporting, wooden shoes?
you cant
Ah through Real Estate. Unfortunately I’ve been investing in balanced funds instead and no where near 1 million! Wish I had bought a house.
1. Kudos to Steve
2. Bond yields aren’t rising for a very long time
You’re welcome
“It’s amazing what happens when you liberate yourself from the land of $2 million crap houses.”
Am I ready for my next ass-kicking on Vancouver real estate?
You betcha!
Why waste 2 million on a heap of crap when 1 million will suffice?
This livable one in Vancouver will most likely go around the 900k mark.
https://www.zolo.ca/vancouver-real-estate/2248-east-30th-avenue
Also, here is one for my buddy North Shore Mike to check out.
https://www.zolo.ca/north-vancouver-real-estate/2260-capilano-road
Asking 998k
It’s on a busy road.
Pretty sure that’s why they invented the volume knob on the stereo…
M45BC
CPD, nah… I’ll allocate that to XLB
I am 100% invested in dividend paying blue chip shares. Like the big 6 banks, telecoms, and pipelines. I only buy the dips when the shares pay 5% or more in dividends. I drip the divvies cuz i don’t need the cash. Compounding. So, nice divvie with a possible capital gain over time. Grandkids can use the inheritance to buy igloos or teepees or whatever. Canada could not exist without the banks, pipelines, and telecoms, three industries which are “protected” by govt. regulations. No brainer.
#11 Bytor the Snow Dog on 08.27.19 at 5:34 pm
Flop: WTF is The Netherlands exporting, wooden shoes?
////////////////////
Hangovers…
M45BC
#11 Bytor
Top 5 Dutch exporters: Shell, Unilever, Philips, Heineken, Akzo Nobel. Does Canada have even a single corporation in that league?
Garth, could a black swan event trigger a sudden rate rise? Something that could really jack up these preferreds to high heaven?
Brookfield has noticed prefs are cheap too! So much so, they’ve been buying them back.
All I know is that you can currently purchase Canadian big five bank stock preferred shares for $15.00 or less per share, with a return that hovers around 6-7%.
These things have a $25.00 par value. Which means I am buying a guaranteed $10.00 upside per share, plus the dividends. I know CDN big banks all are hiking their dividends. They have to pay on the preferreds before they pay on the commons. And I know that none of the big five are going bankrupt anytime soon, so eventually I’ll get my $25.00 back.
The prices don’t make sense. But if someone wants to sell me a $25.00 item for $15.00, I’ll gladly take it.
Hi,
I own some ZRE Reits and it hasn’t dropped at all. Any particular reason it trades differently?
#19 Exurban on 08.27.19 at 6:27 pm
#11 Bytor
Top 5 Dutch exporters: Shell, Unilever, Philips, Heineken, Akzo Nobel. Does Canada have even a single corporation in that league?
/////////////////
Yep, I knew about She’ll because I just put this one up the other day.
As usual I went for the comedy angle, although Heineken did come in at number four on your list.
Should have the Netherlands exported 323 billion worth of products more than Canada last year alone?
Above my pay grade perhaps, but Canada doesn’t seem too concerned about getting their products to market, in particular oil.
Netherlands has Europe on its doorstep and Canada has the U.S, and Asia off in the background.
Having said that, having traveled there, they and Belgium do the mass brew thing about as good as anyone and I did get the odd melon shaker…
M45BC
Charted: The Companies Making the Most Money in 2019
Top 10 Most Valuable Companies by Revenue
1. Walmart – U.S. – $514 billion
2. Sinopec Group – China – $415 billion
3. Royal Dutch Shell – Netherlands – $397 billion
4. China National Petroleum – China – $393 billion
5. State Grid – China – $387 billion
6. Saudi Aramco – Saudi Arabia – $356 billion
7. BP – Britain – $304 billion
8. Exxon Mobil – U.S. – $290 billion
9. Volkswagen – Germany – $278 billion
10. Toyota Motor – Japan – $273 billion
Bonds are at mercy of inflation and interest rates. Today, they also offer negligible income.
Our principal bond ETF has returned 12% in the past year. – Garth
.45% management fees on CPD ETF? Why so high compared to say .05 for VCN of .08 for ZAG? I have been looking to mix some prefs in to my fixed asset holdings based on the blog posts and I guess now is a good time to sell some ZAG. But are the high fees really worth it?
That’s $450 a year on a $100,000 investment. Wow. Real killer. – Garth
air b and bad – good advice
so how many of these covert rentals in condos does the cra know about?
https://gem.cbc.ca/media/marketplace/season-46/episode-18/38e815a-0
I bought NA-T three years ago during a dip at $44 paying 5% div. Collected and dripped the div for 3 years and NA is 60 bucks right now. Not too shabby. I could take a profit and buy CM-T which is paying 5.75 % right now which would give me an increased div payout of about 33%. But i would have to put down the bon bons and drag myself over to the ipad and log into Easy Web and enter that dirty rotten stinkin’ password again and spend 20 bucks on two trades. It gets so tiring ya know? Then stagger back to the pool, reclaim my chaise lounge, crack another Corona and have Fallopia cover me in more sun tan lotion. Again. I don’t know how much more of this I can take.
No discussion of straights. Maybe I’m an outlier here but I avoid rate-resets like the plague. All but one of my preferreds are straights and have barely budged while resets sank like stones. Talk about stability! I like that! They’re hard to find, but for me it’s straights only or forget it.
As for interest rates, they can stay low for a long time. Look at Japan. And unless that preferred you bought at 25 (now selling at 15) is going to be redeemed at 25 on a certain date, well if you bought it as a temporary holding, you might be holding it for a while longer than temporary.
And as for Scotch, I got a bottle of Talisker yesterday. It’s back in stock. Smoky and peaty. Maybe more peaty than smoky. Yup.
#22 ace…$25 is simply the issue price. They will be callable at some price around that, but bank could simply buy at the going rate.
There is no promise they will ever return to $25.
Also I’d like to ask Doug…how would preferred a theoretically perform during negative rates? Intellectual question only.
Par value is par value. They are not redeemable by the issuer for less. – Garth
100% equities for 12 years… I haven’t regretted it!
“Seriously. Be a rebel.”
Working on it! In the land of PC its not popular.
Garth, I love your blog, it has led me to the light and I am trying to be a faithful little sheep while learning the ropes of this investing thing as I siphon my money out of mutual funds. I bought the cpd etf to own prefferreds for all the reasons you state while constructing my b&d portfolio about half a year ago. I’ve even bought more as it has dropped substantially in price since. Ouch, nose to the grind stone, I have faith. However, so far all of my monthly ‘dividend’ payments have been reported as ‘interest’. I thought preffered shares were supposed to pay dividends – can dividends be transformed through an etf into interest? So far most (9/10) of my etfs pay interest not dividends. Does one need to buy individual preferreds to assure dividend income?
You are mistaken. – Garth
Re #11
Thankfully Holland makes the worlds best electronic chessboards, clocks and computers (DGT). Love my Centaur !
Profits on that should be taxed as speculation income. Living in a house for one year and selling it for profit should be taxable.
The Most Splendid Housing Bubbles in America, August Update: West Coast Markets “See the Dip”
https://www.investmentwatchblog.com/the-most-splendid-housing-bubbles-in-america-august-update-west-coast-markets-see-the-dip/
#15 Flop… Comfortable home if only it didn’t exist on the busiest street around …. Mr. Market is slowlyyyyy getting there though….
Morneau Sheppell employee –
“Profits on that should be taxed as speculation income. Living in a house for one year and selling it for profit should be taxable.”
Or should dividend income/capital gains also be tax exempt?
maybe we should reduce income taxes and STOP government spending!! Socks needs to be removed
Well, someone asked last night where he was and so I’ll try and get him to give us wave.
ICHTD9 has gone awol.
Trackie, you alright Ol’ boy?
Or have the shingles started to blow off the roof…
M45BC
Mr. Turner,
Not sure why you don’t care about preferred prices, only the interest rate.
If you buy preferreds paying 5% and their price drops by 15% as they have, and they are still paying 5% based on the new value, you are only getting 4.25% on your original investment, so both the value of your investment and its rate of return have taken a hit.
And the long term performance is nothing to write home about:
CPD 10 year total return = 1.83% (0.8% since inception)
Even the relevant benchmark 10 year total return is only 2.36%.
Read it again. – Garth
#28 Yukon Elvis on 08.27.19 at 7:29 pm
I bought NA-T three years ago during a dip at $44 paying 5% div. Collected and dripped the div for 3 years and NA is 60 bucks right now. Not too shabby. I could take a profit and buy CM-T which is paying 5.75 % right now which would give me an increased div payout of about 33%. But i would have to put down the bon bons and drag myself over to the ipad and log into Easy Web and enter that dirty rotten stinkin’ password again and spend 20 bucks on two trades. It gets so tiring ya know? Then stagger back to the pool, reclaim my chaise lounge, crack another Corona and have Fallopia cover me in more sun tan lotion. Again. I don’t know how much more of this I can take.
———
I’ve got to say, that was entertaining to read. I only have one issue. Fallopia? Really? For some reason, it’s not conjuring a very pleasant picture in my mind. Could you try for something else next time? Fallopia is just not sitting well with me right now.
Flop – thanks for the export data. The Dutch are definitely punching above their weight class.
But we should also have the context of the worlds largest importers as well.
From there we could make the comparison to find the largest net exporter in comparison to size of economy,
as well as per capita.
here is list of largest canadian exporters
http://www.worldstopexports.com/canadas-top-10-major-export-companies/
8 SS – I agree with you on that.
#33 Jmr on 08.27.19 at 8:31 pm
Garth, I love your blog, it has led me to the light and I am trying to be a faithful little sheep while learning the ropes of this investing thing as I siphon my money out of mutual funds. I bought the cpd etf to own prefferreds for all the reasons you state while constructing my b&d portfolio about half a year ago. I’ve even bought more as it has dropped substantially in price since. Ouch, nose to the grind stone, I have faith. However, so far all of my monthly ‘dividend’ payments have been reported as ‘interest’. I thought preffered shares were supposed to pay dividends – can dividends be transformed through an etf into interest? So far most (9/10) of my etfs pay interest not dividends. Does one need to buy individual preferreds to assure dividend income?
You are mistaken. – Garth
———
Some brokerage firms show it that way. Some show any distribution as interest. It doesn’t mean it actually is interest. My year end tax statement showed the right thing though. Worst case, call your brokerage but what is going on is that you probably are just seeing the laziness of your brokerage at work not fixing a simple coding issue in their software.
There are some bargain sales to be had on the TSX.
Take for example, BMO common shares. $89 a share.
Near the 52 week low. 4.6% dividend, likely rising in December.
44% payout ratio.
Income for life. “Look ma, no hands!”
Enbridge is another one on sale.
There are two pref types worth noting – rate resets and perpetuals.
Perps are like bonds – paying a set dividend year in year out without a reset (you lose some to inflation over time, so keep that in mind). These are good when interest rates fall…like now (soon). I was purchasing these for a few months, from solid companies, getting between 5-6% yield (only purchase below par value). These are paying well, and should hold their value as we head into likely a few years of (back to) very low interest rates.
Rate resets are bad when rates fall (if they reset low), and have upside when rates rise. Hence why the values are whacked now, and I also expect will go down further as rates head lower from here. IMO rates will be low for some time (globally most major economy CBs are cutting – Canada *will* follow). This isn’t some quick dip down and then “up up she goes”. Some major deleveraging has to happen.
But the future is unknowable, and rates could again rise, and so buying rate resets when on “super sale” (after BoC cuts a few times) is a good strategy. Rates may rise in the future as countries need to raise the return to get someone to buy their debt in a world awash in it. Look for prefs that reset back in mid-2018, have a good reset value (e.g. 3+% above the 5 year), so they have 5 years (from that point) before resetting. You collect a really good divvy yield for 4 years, and have capital upside protection from any recall. Some risk of resetting low again in 4 years, but then hang on to collect still a decent 3-44% yield until the next cycle.
Balancing perpetuals and rate resets, buying when each is out of favour, accumulating a good portfolio over time.
#41 Stone
I’ve got to say, that was entertaining to read. I only have one issue. Fallopia? Really? For some reason, it’s not conjuring a very pleasant picture in my mind. Could you try for something else next time? Fallopia is just not sitting well with me right now.
…………………………………..
She has a younger sister. Her name is Shatonya, looks good in a bikini. You should swing by.
@#33 Jmr on 08.27.19 at 8:31 pm
Jmr, CPD pays out dividends, not interest. You may have a broker that is mis-categorizing the nature of the payments in your statement. Note that you need to hold a pref ETF/preferred shares in a non-registered account to benefit from the dividend tax credit.
@#30 reynolds531 on 08.27.19 at 8:04 pm
“how would preferred a theoretically perform during negative rates?”
The common rate reset terms would suggest whatever the 5YR Canada rate is plus the premium, typically around 300 points. So, if the 5 Year Canada is, say yielding -0.5%, would people rather put their dollars into negative return GICs or bonds, or make 2.5% interest with preferreds? The spread is always there.
Here you go Vamp.
I’m sure they’ll do an updated import version soon when they compile the numbers.
This one has both the imports and exports from 2017…
M45BC
These 10 Visualizations Put Global Trade Into Perspective
https://howmuch.net/articles/worlds-trade-explained-in-10-visualizations
https://howmuch.net/articles/largest-importing-countries-2017
My CPD bags are already heavy, but if you want value in the Canadian market, look no further than our beat-up but healthy energy sector.
Strong balance sheets, flowing with cash, you can literally buy these companies for book value or less at this time, and simply wait for the sector to return to favour with a new regime in Ottawa and the inevitable return to $75 crude.
#29 will on 08.27.19 at 7:53 pm
This guy
This guy gets it
#47 Tim on 08.27.19 at 10:05 pm
Some newer rate resets (such as CPX.PR.K @5.75%) while resetting on 5 year boc rate, also have a minimum yield stipulated, such that even if rates did go to zero or even negative, the minimum yield would still apply.
These have downside interest rate protection that GICs do not.
Fellow Code Smiths. Tired of making 200k to 500k supporting these entitled little obnoxious alpha mut 7 figure traders.
By far the Best way to build your AI trading Algo’s is using Q code with KDB… My Forex model can’t lose. If I Share, it widens the bid ask and none of us make loot.
Millions of ways to make Millions a year.
Dr Smoking Man
PhD Herdonomics.
#72 Marco on 08.27.19 at 5:15 pm
Why bother? Soon you all be working for Chinese.
Your salaries will change, your diet will change and you will be replaced by Chinese workers because you are slow (fat fingers) and you are lazy (fat). Goodbye brutal anglo capitalism. Goodbye networking, nepotism and tribal economy. Education will be counted as an asset. Canadian experience, what?
————–
Bang on.
Most of the students at UBC are Chinese.
My wife is Chinese.
My son studies at UBC and is half Chinese.
I speak some Mandarin.
Bring it on.
Wow I never expected to have such a detailed answer about preferred shares and you turned it into a post. Super helpful information Garth and Ryan. Thanks for sharing with everyone.
Now to clarify our financial position. It took us 7 years to turn 100k into one million. We are both 37 and we did NOT own real estate in Vancouver. We rented there for 5 years and waited until we where 34 to buy our place in the Okanagan. Only 100k of our net worth is attributed to gains on our Okanagan home. The real gain is from saving over 30% of our income, maxing our TFSA’s / RRSP’s and paying down our mortgage. 70% of our net worth is in equities.
When Greenland ice sheet slides into the ocean, 20% of Vancouver snd Victoria will be underwater.
Also our civilization will come to an end. As it should.
Anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that
‘my ignorance is just as good as your knowledge.’
-Isaac Asimov
Risk takers put food on everyones tables.
Communists steal the food, when it run out to feed everyone then they kill the risk taker. Then the basterds that got them into power.
Not in that order.
Teachers. You are insane. You will be the first to get purged.
Don’t you read history books?
Question; 15% of an entire B&D or 15% of the fixed income?
Boomers if your kids don’t take you out.
The grandkids will do the job with out mercey.
It’s why I openly hate teachers.
https://youtu.be/e9-3RZkzpwM
Back in the day. When fear was back seat driver.
https://youtu.be/gpGegoE3Kik
The problem with the thesis that prefs are there to offset bonds is that that means prefs are doing the same thing as equities (equities and bonds are supposed to offset each other). With 15% prefs that takes you from the volatility of a tradition 60% equities 40% bonds to a portfolio that has the volatility of 75% equites with 25% bonds but without the capital gain upside of the extra equities.
Face it prefs have been a disaster over the past 5 years. They have added volatility and returned a net negative after the dividend. The worst of both worlds.
In a non registered account looking for Canadian dividends you would be better off holding Canadian Bank stocks which pay close to the same dividend but have less volatility and will get you capital gains over time. Canadian bank stocks will also rise if interest rates rise (not likely in the near future). Further I will add in an RRSP you can buy a US fixed dividend pref etf which pay over a 5% dividend and they have not taken the 25% capital loss that the Canadian rate resets have. You get that 5% US dividend US tax free (deferred in Canada) in an RRSP. There is no reason to hold any rate reset prefs. Toxic waist.
Noob question. If prefs take up 15% of the ‘safe stuff’, should the other 25% all be in bonds, or bonds and a wee bit of cash? Also rougly how should one breakdown the 60% in equities? 20/20/20 in US, Maple & EM? Or more weighted to the US?
Hey Garth, yesterday I asked if it is okay to buy a preferred ETF in my not maxed out TFSA or is it best to open an unregistered account only to hold this ETF for the tax credit advantage?
I tried to search elsewhere but people really have a misconception of how preferred shares work. Great timing on this article. For once I did not scent any hate in this one.
Does anyone remembers when Sears was selling kit houses? Doesn’t matter, amazon is doing it now.
http://amp.timeinc.net/time/money/5645820/amazon-tiny-house-kits-for-sale?utm_medium=social&utm_source=twitter.com&utm_campaign=money_moneymagazine&__twitter_impression=true
Enjoy the blog, but once preferred shares is brought up I skip to the next paragraph .. in this case to theà end of the blog ugh
Sears Catatalog Homes some of them preetier that i am.
https://www.google.com/search?q=sears+house+kit&rlz=1C1CHBF_enUS807US807&tbm=isch&source=iu&ictx=1&fir=mYdUGBkSR2WS6M%253A%252CvFlNMrIcpTbnQM%252C%252Fm%252F05b55d&vet=1&usg=AI4_-kTTkfAlhfl_Emuq0ym_XxPNQhIz1w&sa=X&ved=2ahUKEwjH96mPvqXkAhUJQ60KHchQBJAQ_B0wHHoECAkQAw#imgrc=_&vet=1
Now that i am rambeling about homes, does anyone rememrs Frank Lloyd, and his venture in Usonia, minimalistic dewlings? I dont remember him but i did read thing or two about it.
Here is very nice podcast about it.
https://99percentinvisible.org/episode/usonia/
#19 Exurban on 08.27.19 at 6:27 pm sez:
#11 Bytor
“Top 5 Dutch exporters: Shell, Unilever, Philips, Heineken, Akzo Nobel. Does Canada have even a single corporation in that league?”
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That’s what I thought. I knew these stats were flawed. This is not what “countries” export, it’s what corporations manufacture and those goods have nothing to do with the country where the head office of the corporation is based.The goods (like oil) could be manufactured, processed, and exported from who knows where.
#31 Oakville toxic on 08.27.19 at 8:14 pm
100% equities for 12 years… I haven’t regretted it!
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Interesting, because the performance of a 60/40 has done better on both a risk adjusted and outright basis has outperformed for the last 12 years.
If you’d said 9 years you could make a case. But let’s try this, what’s your CAGR, Sharpe and Sortino for the last 12 years?
30 reynolds531 on 08.27.19 at 8:04 pm
#22 ace…$25 is simply the issue price. They will be callable at some price around that, but bank could simply buy at the going rate.
There is no promise they will ever return to $25.
Also I’d like to ask Doug…how would preferred a theoretically perform during negative rates? Intellectual question only.
Par value is par value. They are not redeemable by the issuer for less. – Garth
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The issuing company can buy the pref in the open market and cancel them, as long as all dividends declared have been paid.
If you sell. – Garth
#52 Smoking Man on 08.28.19 at 12:03 am
Fellow Code Smiths. Tired of making 200k to 500k supporting these entitled little obnoxious alpha mut 7 figure traders.
By far the Best way to build your AI trading Algo’s is using Q code with KDB… My Forex model can’t lose. If I Share, it widens the bid ask and none of us make loot.
Millions of ways to make Millions a year.
Dr Smoking Man
PhD Herdonomics.
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RBC wasn’t paying you 500k a year to write VBA.
And why not post your returns and risk metrics? Any decently set up trading system will be able to output those results.
Hello Garth
Thank you for your blog, your time and the dog pictures!
Can I ask your opinion about maintaining this preferred shares strategy for a non-resident Canadian taxpayer with insufficient room in the TFSA or RRSP? For a non-resident, I get hit with the withholding tax and do not benefit from the Dividend Tax Credit.
While I understand the hedge to bonds, would there be another strategy which would be better? Also, you have mentioned rate-resets are predominant in Canada; are these also predominant in the US. Would you recommend for an international investor to also have exposure to US Preferred Shares?
Thank you for your time and look forward to your response
I think that Canadian preferred shares are going much lower, and here is why I think that:
1. There will be a big real estate crash in Canada.
2. Interest rates will go lower, and the Bank of Canada will cut interest rates.
3. The banks and financial sector will get hit hard, along with retail, home builders, and most things associated with the real estate sector.
Those three factors suggest that preferred shares could go much lower.
INTEREST RATES WILL NOT NORMALIZE IN CANADA!
We will have Japan style perpetual low interest rates going forward. Anyone who is buying CPD thinking that they’ll be getting their 5%+ dividend yield AND substantial capital gains is disillusion. Not going to happen. No way these things recover.
If you want a nice dividend yield, there are other places you can find it. You can still have a balanced and diversified portfolio without holding preferred shares.
I would still hold equities, but I would be underweight equities. Stick with low volatility dividend paying equities. I think the upside is limited, so if equities just tread water for a decade, at least hold ones that pay a dividend. Hold Canadian federal government bonds as the main part of your fixed income portfolio. Stay away from the high yield Canadian corporate bonds. If you want corporate bonds, buy diversified global corporate bonds hedged to the Canadian dollar. And hold at least 10% in gold bullion (CLG.C-TO or buy the real stuff and put it in a fireproof safe or safety deposit box).
There could be some good buying opportunities for equities, which is why you should be underweight at the present time. If equities have some big drops, you can sell some of your safe government bonds and buy equities when the central banks step in.
All fearful speculation, and all wrong. Real estate will flatline overall, not crash. Central banks will lower rates – more in the US than here. A mild recession, if any. The banks will be fine. Prefs constitute a major buying opportunity for those not willfully blinded by their own lack of confidence. – Garth
@#53 Ponzi Pilot
“Most of the students at UBC are Chinese.”
****
Old news.
If the “degree factory” aka UBC is like any other Canadian University it needs foreign students ( and their “double tuition fees”) to survive.
How else would we keep the doors opened on those hallowed halls of learning?
Deficit spending , politically correct Liberals or……. Gofundme?
A balanced and diversified portfolio should have about 15% in unloved preferred shares. Seriously. Be a rebel. – Garth
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“If you’re going to be crazy, you have to get paid for it or else you’re going to be locked up.”
― Hunter S. Thompson
#62 Stylite on 08.28.19 at 3:50 am
Hey Garth, yesterday I asked if it is okay to buy a preferred ETF in my not maxed out TFSA or is it best to open an unregistered account only to hold this ETF for the tax credit advantage?
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“best” depends on your situation.
Preferreds (or any other dividend or interest payout) held in a TFSA or RRSP won’t have any taxes due, you will not receive a T5.
So for example you have 1000 shares of ZPR in a TFSA as of July 30th, on Aug.2 you would receive $43.00. 1000 * 0.043 = 43 Payout is monthly.
It’s that simple.
#52 Smoking Man on 08.28.19 at 12:03 am
By far the Best way to build your AI trading Algo’s is using Q code with KDB… My Forex model can’t lose. If I Share, it widens the bid ask and none of us make loot.
—————–
How about sharing it with just this 1 fellow trader?! I know my account (even with the 20x leverage) would make a difference in the spreads. Peeing in front of a Cat 5 hurricane isn’t even a close comparison given how big the market is.
*wouldn’t
Yukon Elvis on 08.27.19 at 7:29 pm
I bought NA-T three years ago during a dip at $44 paying 5% div. Collected and dripped the div for 3 years and NA is 60 bucks right now. Not too shabby. I could take a profit and buy CM-T which is paying 5.75 % right now which would give me an increased div payout of about 33%. But i would have to put down the bon bons and drag myself over to the ipad and log into Easy Web and enter that dirty rotten stinkin’ password again and spend 20 bucks on two trades. It gets so tiring ya know? Then stagger back to the pool, reclaim my chaise lounge, crack another Corona and have Fallopia cover me in more sun tan lotion. Again. I don’t know how much more of this I can take.
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This is epitome of complacency.
I call top
When you believe that 40 bucks to take profits is a nad thing I suggest that making zero profit is a possible future.
Not saying the dividend isn’t great. It is.
But look at hte rounding top of the major indices. If they don’t make a new high by month end traders will sell.
Investors don’t make this market – traders do.
Further, we are seeing the largest volume of insider selling since 2007.
They know what none of us do. Analysts are pumping labour market and “fundamentals”. They are not leaading indicators they are trailing indicators imho.
What is important on up days there are massive sell volumes. On down days – zippo….
That is a huge tell. Many are going to cash, gold, silver, and bonds.
The business cycle is crashing not slowing. To rebuild the Chinese supply chains elsewhere is gonna cause problems.
Sit by the pool and sip your sippy cup. If your preferred drop 40% will you still be sipping? Or running to your tablet witht the herd?
There are always great entry points. imho this is not one of them.
There will be better days – yes
just saying
Here is the latest import numbers fresh of the press from howmuch.
So the 2018 numbers for Canada.
In the door 469b
Out the door 450b
For the Netherlands
In the door 646b
Out the door 723b
Also from the export article I posted last night…
“We gathered our data from the World Trade Organization, which tracks the total value of all the goods each country exports. Keep in mind that this data does not include services, only physical goods.”
I like them, they are not afraid to show their sources or how they arrived at certain numbers and keep things as simple as possible for dumbo’s like myself…
M45BC
“Mapping International Trade: Who Are the Biggest Importers?
Every country in the world relies on imports to bolster its economy. Imports allow consumers to buy and take advantage of products that may not be available in their own country. Your own home is probably filled with products imported from countries around the world.
Have you ever wondered how much your home country relies on imports to thrive? Check out our visualization to find out which countries spend the most on imports.
At $2.6 trillion, the United States is the world’s largest import country.
As the trade war between the world’s two largest importers (the United States and China) carries on, it’s yet to be seen how much of an impact it will have on these countries’ economies.
The European Union is, collectively, the world’s largest importer, sending $6.5 trillion on imports.
To create our graphic, we pulled the latest data from the World Trade Organization on international trade. The WTO records the total value of physical goods imported by each country. Using this data, we can see the total value of each country’s imports. For ease of use, we shaded each country relative to the total amount spent on imports.
World’s Largest Importers
1. United States: $2.6 trillion
2. China: $2.1 trillion
3. Germany: $ 1.3 trillion
4. Japan: $749 billion
5. United Kingdom: $674 billion
World’s Smallest Importers
1. Niue: $21 million
2. Montserrat: $31 million
3. Tuvalu: $35 million
4. Marshall Islands: $80 million
5. Kiribati:$100 million
https://howmuch.net/articles/the-worlds-biggest-importers-2018
Giving your tax money to people with no money to buy houses they can’t afford so house prices stay high so banks can make record profits on loans they have no responsibilities for already (thanks CHMC):
https://ca.finance.yahoo.com/news/a-new-incentive-can-help-firsttime-home-buyers-in-19-parts-of-the-country-162308650.html
Remember it is all aimed to help you…. get deeper in debt. What a pile of crap.
“The true madness is pension funds being forced to invest in assets which will be guaranteed to lose, such as in the case of long dated inflation-linked gilts at real yields of -3%,” said Mark Dowding, chief investment officer at BlueBay Asset Management, which has pension-fund mandates. “It is financial vandalism and the government and central banks need to wake up to this.”
Cases are legion. One of the Nordic region’s largest pension funds is reducing its stock of government bonds for alternative assets, which could include real estate and private equity. A scheme for the retired clergy in England is shifting allocations to private credit. A fund for U.K. railworkers, meanwhile, is looking to boost exposure to private debt to as much as 40% within a private-investment strategy totaling 4.5 billion pounds ($5.5 billion) across two funds.
https://pensionpulse.blogspot.com/2019/08/pension-world-reeling-from-plunging.html
I see a lot of people asking questions about asset allocation, as in how much percentage of each to hold. There is no perfect answer, and trying to find one is likely to drive you to drink. We’ll only know the best asset allocation for the next 20 years in 20 years. The equities/safety split is the most important one to decide on, and then your savings rate. For equities split, you could do worse than just following the Vanguard portfolios, or simply buying the 100% equity ETF. The Vanguard equity split goes 40% US / 30 % Canada / 30% rest of world. 30% Canada is high for my taste, but may be justified by being in your home currency.
Foodbank South Australia has been approached by banks wanting to refer their clients to the charity, in the hope it will prevent people from defaulting on mortgage payments.
https://www.abc.net.au/news/2019-08-27/foodbank-supporting-clients-struggling-to-pay-mortgage/11453556
@ #22 Ace… Can you post examples of some PS trading under $15
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What preferred etf is best then to make dividends but avoid this horrible downturn in them?
The decline is over, or nearly so. Prefs appear to be truly a bargain. – Garth
Does it matter which preferred share ETF? Are any fraught with too many perpetuals, too many holdings close to $25, or have other drawbacks?
The fantasy of Central Bank “Growth” is now imploding
https://www.oftwominds.com/blogaug19/fantasy-imploding8-19.html
Thank you Garth, # 43 Stone, #47 Tim. I am reassured that cpd pays dividends (a call to my online broker support was unhelpful to this regard), now I can comfortably (sort of) buy more. I’m also hopeful Im getting dividends not interest from alot more if my etfs than my statement states too.
#84 Ed on 08.28.19 at 11:15 am
@ #22 Ace… Can you post examples of some PS trading under $15
ENERGY SECTOR!!!!!
A throw from left field…
Funny how life is – some people just get a harder road to climb. I don’t know why but Ralph Klein crossed my path many times (he would never remember them). I grew to like him. He was a populist Premier unless you were public service – who can forget Ralph bucks. He was not the smartest in the room but with Rod Love he got things done – PHD’s must be rolling over.
I had a co-worker who lived near Ralph and he would tell me stories about police calls – Ralph liked alcohol. It turned out Ralph was a client of my dentist. He claimed Ralph suffered from dementia long before his retirement. Nonetheless, Ralph was one that I respected. I see no evidence he lied for gain.
Thanks mike from mtl. Yeah I over complicated it. TFSA is tax free duuuh. Fill er up
2 million invested will allow you BOTH to “reduce” working hours!? As in both of you think youll still have to work? Lol you’re doing it wrong