Quote:
Originally Posted by fotze
The part I didn't understand is where he says, just sticking the down payment money in bank preferred shares paying only 5% and claiming the dividend tax credit would give a better after-tax return. And no risk.
Is 'bank preferred' stock locked in? I actually went to buy some of this 5% no risk stuff. What is he talking about? BMO has a 4.8% dividend but has gone down by that or more. Thats not 'no risk'. |
The below in no way constitutes investment advice and should only be used for discussion purposes. I am not a Financial adivisor.
He's talking about Preferred Shares that are issued by the Banks, not the common stock. They trade daily on exhanges and are fairly liquid so not 'locked in'. They pay dividends at a prescribed rate (different rate reset mechanisms apply to different series of shares and by banks that issue them) and get priority over common shares. As such these preferred shares tend not to move up and down too much and just quietly pay dividends.
They aren't of course 'no-risk' as they are instruments of the banks that issued them (IE RBC, BMO, CIBC, TD, Scotia) and thus if the bank were to go under (or a scenario where the bank had to suspend common and preferred share dividends but somehow avoided default) you would get stiffed. (You can diversify some of this risk away by investing in an ETF of preferred shares in a variety of companies in North America - ishares sells one of these products - XPF)
The 'no-risk' comment was really reflecting that your risk is essentially the risk that the bank goes bankrupt (Which pretty much never happens in Canada). The point was that an investment in preferred shares is an order of magnitude less risky than buying that condo in Calgary and yet likely would still yeild a greater after-tax return. This is the crux of the real estate problem in Canada right now, people are taking on enourmous risk in large dollar amounts in real estate and not necessarily getting compensated for taking them.