Randy LeClair is Managing Director and Senior Fixed Income Strategist at Manulife Asset Management. His focus is fixed income.
Thomson Reuters Floating Rate Series II (TRI.PR.B-T)
Thomson Reuters Floating Rate Series II is a floating rate preferred share that is redeemable by the company anytime at the original $25 par value. The dividend is paid quarterly and is based on 70-per-cent value of the prime rate (currently 2.1 per cent) or an estimated annual dividend of $0.525 per share. On the current price of $17.58 (May 12 close) this equates to 2.99-per-cent current yield. This yield will move higher as the prime rate moves higher and offers great protection for those worried about rising short-term interest rates. There are other bank floating rate issues trading at slightly lower yields however none have this type of call protection (investor is paid $25 if redeemed by the company which is $7.42 capital gain). This is the largest single holding in our fund and our average purchase price is $22.03.
Brookfield Renewable Energy 5.00% Series 5 (BRF.PR.E-T)
Brookfield Renewable Energy 5.00% Series 5 is a perpetual (straight) preferred share with an initial "call" date on April 30, 2018 at $26 and then drops by $0.25 per year to a call price of $25 in 2022 – currently trading at $21.50 (May 12 close) (held in the fund) – average purchase price in the fund is $24.40, (current yield of 5.81 per cent and a yield-to-call (2022) is 7.38 per cent, Bond Equivalent Yield (BEY) – 9.96 per cent)
Enbridge Inc. 4.00% Series 3 (ENB.PR.Y-T)
Enbridge Inc. 4.00% Series 3 is a rate-reset preferred share with "call" date on Sept. 1, 2019 at $25 or it will reset in 2019 at +238 basis points fixed or floating – currently trading at $24.51 (May 12 close) (held in the fund) – average purchase price in the fund is $25.03, (current yield of 4.08 per cent and a yield-to-call (2019) is 4.59 per cent, Bond Equivalent Yield (BEY) – 6.20 per cent). Suggest investors also check the new issue Enbridge Inc. preferred share that came out on Monday (May 12) and pays a 4.40-per-cent dividend (no ticker as yet).
Past Picks: March 15, 2013
Power Financial 4.80% Series S (PWF.PR.S-T) - (paid $1.40055 in dividends)
Then: $25.00; Now: $23.94 -4.24%; Total return: +1.36%
TransCanada Corp. 4.00%, Series 7 (TRP.PR.D-T) - (paid $1.1562 in dividends)
Then: $25.60; Now: $25.47 -0.51%; Total return: +4.01%
Bell Aliant 4.25%, Series E (BAF.PR.E-T) - (paid $1.192775 in dividends)
Then: $25.44; Now: $24.10 -5.27%; Total return: -0.58%
Total return average: +1.60%
Although the current interest rate cycle is creeping toward the end, the next 6 to 12 months should remain supportive of this low and stable rate environment. Economic data is showing a pick up in growth and unemployment inching its way lower. These are positive factors, however wage growth remains low, inflation is tame, and consumer debt levels remain high. It is not exactly the situation that causes central bankers to start increasing short-term interest rates in an aggressive manner and to slam the brakes on the economy. The end of the Quantitative Easing program in the U.S. is still about 6 months away and it will most likely be another 6 months before talk of interest rate increases make their way to the headlines. As we are reminded by the central bankers, much of how this will unfold will be "data dependent". Short maturity government bonds appear to be anchored in place for the time being while longer term government bonds may be subject to headline risk. Value can be found in investment grade corporate bonds and preferred shares. Investors must be cautious and selective going forward when it comes to their fixed income portfolios.