Split Preferred Shares

Also known as “structured share”, this type of preferred share is a synthetic vehicle. It is based on the dividend portion of an underlying portfolio of common shares that is split into a capital portion and a dividend portion. The capital portion of the underlying portfolio serves as the basis of “split capital shares,” which pay no dividends and are not considered preferred shares. The capital portion is linked to the underlying portfolio of common shares. The dividend portion is influenced by the dividend component of the portfolio of common shares. The split preferred share pays the dividend paid by the underlying common shares of the portfolio. The preferred share is attached to the dividend portion. It also has a priority right to the net asset value of the portfolio. In many cases, this type of preferred carries a right of redemption at dates set out in the prospectus. Since the creativity of investment dealer financial-engineering teams is virtually unlimited, every structured preferred is different and should be carefully analysed before acquisition. This type of vehicle will tempt investors seeking a higher dividend income than that offered by, say, bank preferreds. The inherent risk of split preferreds is the quality of the underlying portfolio. A decline in its net asset value or dividend payout could lead to a decline in the value of the preferred, implying that it may not be redeemed at par on the redemption date. Also, investors in the secondary market must consider the risk of investing in a security with a premium price.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca