Have you considered Preference Shares?

Reaper

Preference shares don't seem to get mentioned much but as I've just bought a bunch I thought I would pass on my findings.

Firstly, what are they?

You trade them like ordinary shares, but they have the following differences:
1) They pay a fixed rate of income. Either to a fixed redemption date when the capital is given back or forever. There are a few other variations such as optional conversions to ordinary shares so check the details for your target before buying.
2) Companies can stop paying you BUT no ordinary shareholder is allowed to get a dividend until the preference shareholders get paid, and if they are "Cumulative" preference shares then all the missed payments have to be caught up and paid out when they restart.
3) Like ordinary shares you lose your money if the company goes bust, though you are ahead of ordinary shareholders in the pecking order when the remains get split (but behind all forms of debt such as company bonds).
4) They can have a large spread (ie the buy and sell prices can be very different) so are best held for the long term.
5) Because they pay a fixed interest regardless of how well or badly the company is doing they do not change in price much. How likely people think the company is to go bust and what competing interest rates are doing are the things which most affect the price.

Tax wise they are like ordinary shares having only 10% tax deducted for basic rate tax payers making them much better than a savings account, and the yield figures quoted will almost always already include this tax (I have only ever come across 1 that did not do this).

If you want to know more about the difference between Preference Shares, PIBS, subordinate bonds and ECNs then you can find more info here:
http://www.collinsstewarthawkpoint.com/Global/fixed%20interest/Pref,%20PIBS%20and%20ECN%20Overview.pdf - EDIT: Sorry - document seems to have been removed since I wrote this.

There are surprisingly few preference shares left in existence (about 100) and many are bank shares which I am avoiding because I don't trust the banks to stay solvent and because they tend to be Non-Cumulative so they can stop payments on a whim.

So today I bought into Royal Sun Alliance (RSAB) at around 102p which are Cumlative and last forever. That means I can expect a 7.27% yield for as long as I choose to keep them. As a basic rate tax payer I would have to find a savings account paying 9.11% to match that!

There are preference shares paying better rates than that but the No.1 thing to do is pick a company you do not think will go bust or be nationalised and I feel RSA are reasonably safe.

I hope the info is of use to some of you looking for a good income and willing to take a small risk.

I have a bit left over and am now looking for another good preference share. Anybody got any suggestions?

Ark_Welder

Preference shares usually have restricted voting rights - but not something that is likely to be too much of a bother given that ordinaries are usually held in nominee accounts that have the same restriction!

Also, investment trust ZDPs, i.e. Zero Dividend Preference shares. Should pay out a fixed return on a specific date. The gain falls under CGT regulations rather than income tax, so can be useful for higher-rate payers. There are still a few ZDPs about too!!

[Edit]
Wide spreads might be an indication that some of these instruments are not traded as frequently as others.

Reaper

Yes I skipped zeroes to keep things simple. You are right about the voting. You have no entitlement to vote or even attend an AGM, unless it is about something that directly affects your rights.

qpop

Reaper wrote: »

Yes I skipped zeroes to keep things simple. You are right about the voting. You have no entitlement to vote or even attend an AGM, unless it is about something that directly affects your rights.

or the dividend payment is in arrears. That will generally give you voting rights

Reaper

I just thought I'd let you know I decided on my other purchase. I went for another insurance company General Accident (owned by Aviva) ticker GACA. Slightly higher risk as Aviva do a lot of business in Europe but my feeling is the ordinary shareholders will have to face any problems in the form of rights issues etc, and the preference shareholders will be OK. They are Cumulative (the only kind I will buy) and have just gone ex-dividend so I will have to wait a while for my first dividend but that's no problem as I plan to hold for the long term.

I haven't worked out the yield exactly as I got a slightly better price than I expected but it is about 8.4%, or equivilent to a high street savings account rate of 10.5% for a basic rate tax payer.

Now I just have to hope interest rates don't shoot up!

sabretoothtigger

Why are prefs are more liable to inflation then ordinary shares. You dont own a share of the company with a pref ?

So as its revenue rises and the nominal profits allow the prefs to be paid more easily it means the ordinary shares are disproportional more valuable and liable to growth is how it works ?


Somebody mentioned Natwest prefs recently, they seemed a good deal especially in the past where the yield was/is 33%

Ark_Welder

sabretoothtigger wrote: »

Why are prefs are more liable to inflation then ordinary shares. You dont own a share of the company with a pref ?

So as its revenue rises and the nominal profits allow the prefs to be paid more easily it means the ordinary shares are disproportional more valuable and liable to growth is how it works ?

The distributions from preference shares is usually a fixed rate (see note at the end) and so would have its real value reduced by inflation over time. Normally, you would expect the dividend from a pref to be higher than that available on the ordinaries as compensation for this and the fact that there are restriced voting rights etc. Also, as Reaper states in point 2, the dividend on the prefs will be paid before the ordinaries can be paid, so they might be deemed to be more reliable than those from the ordinaries. But yes, over longer time periods holding the ordinaries ought to result in a higher overall nominal dividend payment - if the company grows it revenues...!

+++

Note regarding fixed dividends from preference shares.

Not always! The LBG 6.0884% have a fixed payment until 2015 (although just at the moment it is fixed at zero percent!), after which is moves to LIBOR + 1.31%, so it will become variable (like a Floating Rate Note). However, LBG has the option of redeeming some or all of the shares at this time, or on any subsequent dividend payment date( subject to a few restrictions), and will be redeemed at the relevant 'Redemption Price per Preference Share'. There are similar preference shares in the LBG stable and looks like Santander might have one similar, so there may be others.

The moral being, always read the relevant prospectus....

Reaper

^ wot he says.

As with company bonds if they are due to be redeemed on a certain date that means you can calculate the "running yield" up to that date, taking into account the final redemption.

Some pref shares give the company the option of doing something with them on a certain date if they choose, as described by Ark Welder. Others are the opposite. Balfour Beaty preference shares give you the option of converting them to ordinary shares at a rate of 100 preference shares into 24.69 ordinary shares on certain dates if you want. That could be a very useful feature though right now with their ordinary shares in the doldrums nobody will be wanting to make use of it.

Both the shares I went for are much simpler just paying fixed rates forever.

moneylover

an extremely useful thread and have been clicking the thanks button....remembering my manners even at 2.30am!
Reaper gave a very good description of these shares and the pluses and minuses have been discussed but how do you find out what is available at what spread and who do you best buy through?

Ark_Welder

On this page from the LSE there is a link towards the bottom called 'List of Debt Securities'. An Excel spreadsheet downloads. Sort into alphabetical order on column 'Stock Description'. The preference shares are described as 'Preference Shares/Stock' (just below the PIBS grouping). The 'Description' column shows those that can convert into ordinaries at some point.

To find a quote, copy the ISIN number for a security and paste it into the 'Quotes Search' field towards the top right-hand corner of the LSE's web-pages (by which I mean http://www.londonstockexchange.com rather than www.lse..., which is something else). You can then click on the security name to get the bid/ask prices and other information, e.g. last 5 trades. If the prices are zero or blank then that security is probably not traded very often or is a very small tranche. You are best looking at these during the trading day rather than at the market open/close to avoid widening spreads, or when the market is closed because the bid/ask prices usually disappear and only the close price is displayed.

With the ISIN number you will also be given the EPIC code which can then be used on other web-sites that might show bid/ask when the markets are closed. It should also be possible to use the EPIC to get quotes via your usual broker in the usual manner: shouldn't be any restrictions (apart from security liquidity, perhaps) but you would need to check with your broker.

Reaper

I used the following sources:
1) Speadsheet of financial cos preference shares
2) Spreadsheet of non-financial cos pref shares

I just used my usual broker (XO). I sometimes had to use alternate tickers to locate the shares but apart from that no issues. Apparently Collins Stewart can sometimes offer tigher spreads but they won't be interested in taking you on unless you have at least £50,000 to invest.