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What to do with risky preferred shares? Don't own them at all

A reader recently asked what to do about some preferred shares in his portfolio that he was quite correctly worried about.

The investment he asked about was a preferred share issue from Aimia Inc., parent company of the popular Aeroplan customer loyalty program. Aeroplan announced in May that its star attraction, Air Canada, will exit to start its own client loyalty offering starting in 2020.

This reader's question arrived just a short while before Aimia announced it was suspending the dividend on both its common and preferred shares. Each of the company's preferred share issues traded in early July in the range of $9. Preferred shares are typically issued at a price of $25.

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What to do with preferred shares from any non-blue-chip company? How about never owning them in the first place. Preferred shares – and bonds, for that matter – are primarily income investments. Own the shares or bonds that offer maximum certainty you will get the dividends or bond interest you're owed on time, without fail.

The appeal of Aimia's preferred share was the high yield. At their 52-week high of $18.60, the C series of Aimia preferreds offered a yield of 8.4 per cent. If you're an income-seeker, a yield that high on a preferred share is a loud warning of risk that dividend payments are not as secure as they would be with, for example, a bank or a financially strong utility.

You have to take some risks in a portfolio to earn a decent return. The place to take those risks is in the slice of your portfolio devoted to the stock market. You can afford this risk-taking in a diversified portfolio because of the stability you get from bonds and, to a lesser extent, preferred shares. If you take risks in bonds and preferred shares, you remove the core of safety from your portfolio.

High-yielding preferred shares could be a decent speculative play where you pocket a high yield while waiting for a rebound in the share price. But tossing shares like this into your portfolio bucket devoted to safe investments is asking for trouble.

As for this reader's Aimia preferred shares, there's an argument to be made for selling them and taking a loss. In investing, mistakes will be made from time to time. The goal is to never make them twice.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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