1. Preferred Shares For Taxable Fixed-Income Portfolios

2. Ontario Marginal Tax Rates Interest Widows & Orphans 21.05% Professionals 39.41% Plutocrats 46.41% Dividends Widows & Orphans 0.00% Professionals 13.81% Plutocrats 23.96%

3. Dividend / Interest Equivalency Factor How much interest gives the same after-tax income as $1 Dividend? Figures for Ontario Widows & Orphans: $1.27 Professionals: $1.42 Plutocrats: $1.42 Figures do not account for clawback of Old Age benefits Dividends of 5% are as good as Interest of 7%, after tax effects

4. Types of Investment Common Stock –Represents ownership interest in company –Pays dividends –Chance for Capital Gains or Losses –Takes first loss in the event of difficulty –Subject to dilution when new common issued

5. Types of Investment Bonds –Fixed rate & Schedule of income –Holders can put company into bankruptcy –Little or no chance for Capital Gain / Loss (from issue price) –Asymmetric risk / reward –No dilution of claims (quality may suffer) –Have First-Loss Protection

6. Types of Investment Preferred Shares –Fixed rate & Schedule of income –Holders CAN’T put company into bankruptcy –Little or no chance for Capital Gain / Loss (from issue price) –Asymmetric risk / reward –No dilution of claims (quality may suffer) –Income is received as dividends –Have First-Loss Protection

7. Preferreds vs. Bonds Trade-off Bankruptcy provisions –Income suspension –Seniority in bankruptcy Liquidity –Fewer big players in preferred share market –Volatility of market price Income –Therefore, after tax income must be higher

10. Types of Preferreds Floating Rate [All these are Perpetual] –Ratchet –Fixed-Floater –Floater –Fixed Reset Retractible –Operating Retractible –SplitShare Perpetual –Premium –Discount Very different risks & rewards

11. Floating Rate Preferreds Class includes any issue that resets its dividend on a schedule. Usually bought with a view to inflation protection –Common stock in resources is better hedge Credit risk is perpetual Homogeneous market implies cliff risk Can be attractive when unpopular

12. Operating Retractibles Most bond-like of all preferreds Often priced to provide after-tax yield equal to bonds, despite increased credit risk However, lack of pension money may often lead to volatility and opportunities

13. Split-Shares Bond-like –Set Maturity Date (sometimes callable) –Income and Principal covered by investment portfolio Asset Coverage Ratio important measure –Restrictions on payments to Capital Units? –Retractions? –Nature of underlying portfolio

14. Perpetuals Fixed income payments, no maturity date –Floaters are also perpetual! Redeemable by issurer, no retractions –Calls are bad! Highest return, highest risk Credit quality extremely important

15. A Preferred Share Portfolio No more than 50% of fixed-income total –Offset risks of preferreds with bonds Fewer Financials Shorter Term Less diversification requires higher quality Diversification available via ETFs –DPS.UN –CPD Active management available via funds

16. Resources Credit Quality –www.dbrs.comwww.dbrs.com –www.standardandpoors.comwww.standardandpoors.com Issue characteristics www.prefinfo.comwww.prefinfo.com Daily commentary www.prefblog.comwww.prefblog.com Newsletter www.prefletter.comwww.prefletter.com