Understanding TD preferred shares

Dec. 7, 2019

Introduction

It is time for me to understand one more financial product. It is called TD preferred shares. 

All types

Preferred Shares are also more complicated than common shares. Each issue has it’s own different set of rules, so even two different issues of Preferreds from the same company may have wildly different behaviors, which is why each issue trades under a different symbol on the market. Here’s TD Bank’s Preferred Share issue, which they label as “Class A Preferred Shares, Series Q” and trades under the symbol TD.PRQ.CA.

Generally, there are three different types of Preferred Shares:

1. Perpetuals. These pay a fixed rate dividend that never changes.
2. Floaters. Floating Preferreds pay a dividend rate that’s pegged as a premium to interest rates. So if a Floater is issued at a 3% premium and current interest rates are at 2%, then the Preferred would pay 5%.
3. Fixed Rate Resets. These are hybrids of the above two. They pay a fixed rate for 5 years, and then reset based on interest rates like Floaters.

Why is this important? Perpetuals are more like traditional bonds and will go up in price if interest rates drop. Conversely, they will go down in price if interest rates rise. Floaters and Fixed Rate Resets will do the opposite. They will do well in a rising interest rate environment, and do worse in a falling one.