Investment Q&A

LFE.PR.B holds a concentrated portfolio of large Canadian life insurers (MFC, SLF, GWC, etc.), which are relatively stable dividend payers with good capital bases. Preferred distributions are cumultiave, which means that missed payments accrue, helping to protect income to an extent if the portfolio softens. Unlike individual company preferred shares, split corp preferreds depend on the value of the NAV relative to the par value. If the underlying insurers weaken materially, preferred price and even capital return at termination can be impacted. We would consider the yield relatively stable as long as the life insurers continue paying dividends and credit markets do not deteriorate. 

PIC.PR.A has a solid track record of stable preferred distributions, and its portfolio is largely Canadian major banks (BMO, RY, TD, BNS, etc.). It uses covered call strategies on the banks to generate extra income and help to mitigate NAV drawdowns. 

We think both are credible preferred share instruments, but there is still risks of the underlying portfolio deteriorating (individual stocks declining), and interest rate risk (rising yields can push market prices lower even if distributions continue).