Is it worth leveraging your portfolio to buy preference shares?
There are a number of different preference shares that offer a yield of around ten per cent per year, such as Heimstaden pref, Corem D and K2A Pref. Is it worth leveraging your portfolio to buy preference shares? With a portfolio leverage of around 2.50 per cent at Nordnet it is possible to create an upside of 7.5 percent per year, which thus requires that the portfolio is mortgaged, which entails a risk.
Some of these preference shares also have a redemption price, a price at which the issuing company can request redemption of the preference shares. In recent years, we have seen on several occasions that several preference shares have traded above their redemption price, which thus implies a risk of early redemption. For this reason, it is important to be aware of the terms and conditions of the preference shares.
Furthermore, over the years there have been several of these preference shares in which the dividend has been suspended. They are designed so that the interest is recorded as a liability of the company, which means that, in theory, the holder will receive this interest later. If the company goes bankrupt, there will of course be no interest, but there should be compensation if the company chooses to offer the option of early redemption.
Senior bonds move higher up the credit structure
Preference shares, and also so-called D-shares, differ little from ordinary ordinary shares in that they pay a higher and often predetermined dividend, which takes precedence over ordinary shares. This means that they rarely rise in price, except when interest rates fall.
Another alternative to buying preference shares or D-shares is to buy either hybrid bonds or so-called senior bonds, which move higher up the credit structure given that the issuer gets into trouble.
In particular, an interesting bet when interest rates peak to turn down and dividends are fixed. From a purely calculative point of view, this is the interest rate you have to have in view of the risk.
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