Are you wondering what to add to your portfolio in order to achieve a diversified investment selection? Have you ever given any serious thought to preference shares? Do you fully understand what preference shares are? Have you ever considered investing in US preference shares? Lets' take a closer look at preference shares and see if this is the way to go in 2008.

We will start with a brief definition, preferred stock or preferred shares are capital stock, which provides a specific dividend and which takes precedence over common stock in the event of liquidation. These shareholders are privileged to have partial ownership in a company (although they do not enjoy any of the voting rights of the common shareholders); they have a greater claim to its assets and first claim to dividends. They rank below bonds but ahead of ordinary shares in terms of liquidation. Preferred stockholders may also have a convertibility feature which allows conversion into common stocks.

These stocks are legally shares but they are very different from ordinary shares. The economic effect of preference shares is more like that of bonds. More so as the income stream from preference shares is similar to that from debt since the fixed dividends are set as a percentage of the face value of the preference share. In other words, the dividend on a preference share is set at a particular rate of interest which is calculated on the face or par value of the preference share. Despite these attributes they are classified as shares and are subject to similar tax treatment. In Jamaica there is no withholding tax on the dividends of preference shares that are listed on the Jamaica Stock Exchange while in the US tax is withheld on the dividends that are payable to US residents. However, there are many preference share issues in the US which do not withhold tax on dividends payable to non-residents of the US.

Most investors don't know much about preference shares however if it is income that you're after then they are worth considering. Preference stocks are a way of getting the steady income of a bond while also getting some of the benefits of an equity investment. Preference shares can rise in value if the credit rating of the issuing company improves or if the general level of interest rates falls. There are a couple of quirks in the system that makes preference shares particularly attractive for income seekers. Some preference shares carry cumulative dividends; meaning that if the company misses a dividend payment this amount is carried forward and the arrears must be paid off when the company resumes making dividend payments. So much so that no dividend can be paid to common shareholders until all outstanding preference dividends are cleared.

Local Issues

In the past year there has been an upsurge in the number of companies in Jamaica that have been offering preference shares. Mayberry Investments came to the market last November raising 500M at $3 per share on a 12 per cent p.a. preference stock. Jamaica Money Market Brokers shortly followed in December with two tranches; a 12.25 per cent pa stock priced at $2.95 per share and a 12 per cent pa stock priced at $3 per unit, both will be redeemable in three years. Pan Caribbean was next with their issue earlier this year. The shares were offered at 12.5 per cent p.a. for $200 per share for a minimum purchase of 500 units redeemable in five years.

Overseas Issues

Diversifying your portfolio with preference shares is by no means limited to Jamaica; there have also been attractive issues by US banks and companies. Deutsche Bank has recently issued QDI preference shares offering 8.05 per cent at a price of $24.98 - $25.10. Other issues brought to the marker by Deutsche include 7.35 per cent for a price of $24.00 - $24.40 and a more attractive issue of 7.60 per cent for a price of 24.60 - 25.90 just to name a few. Of course Deutsche Bank isn't the only recognizable bank that offers preference shares. Barclays Bank also offers attractive preference shares, the highest being 8.125 per cent at a price of $25.20 - $25.45.

In a period when US rates are on a downward path returns as high as eight per cent net on any US investment is eye-catching. There also exists the potential for capital gains in the future as the current crisis in the US financial market unwinds.

Preference shares or preferred stock offer an interesting combination of a high yielding fixed income and equity investments. In addition to considering local issues, investors can also look at US preferred stock to further broaden their investment choices.

Dian Blackwood is a personal financial planner at Sterling Asset Management Ltd. E-mail: info@sterlingasset.net.jm

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