In these days of low fixed-income returns, preferred shares of Canadian banks are offering impressively high rates. In some case the dividend yield is above 6% per year. What gives?
Let’s take Bank of Nova Scotia series 12 preferred shares (ticker: BNS.PR.J) as an example. As I write, these preferred shares are trading for $21.65 and pay a dividend of $1.52 per year (actually a half-cent more than this). This is a dividend yield of 6.08%.
According to the prospectus, Bank of Nova Scotia can redeem these shares any time after 2013 October 29 for $25 each. So, you either get to keep collecting your 6.08% each year or they take the shares off your hands for a capital gain of $3.35 per share. This sounds like heads I win and tails I win.
Lenders are still offering rates on 3-year closed mortgages below 4%. So, there is a spread of over 2% between what you could pay for a mortgage and what you could collect on these preferred shares.
There is always the possibility that Bank of Nova Scotia could default on its obligations, but how likely is that? This all seems too good to be true. What am I missing?