Preference shares below face value...

Hey,

just wondering if there's something I'm missing? It seems like a fairly good idea to buy preference shares, paying a reliable dividend at below face value? Obviously there is a risk they'll continue to go down, but worst case scenario you hold on for the ride and collect dividends along the way. Aside from opportunity cost, is there any reason not to do this? In addition, anything to avoid or look for when looking at preference shares?

herzy said:

It seems like a fairly good idea to buy preference shares, paying a reliable dividend at below face value? Obviously there is a risk they'll continue to go down, but worst case scenario you hold on for the ride and collect dividends along the way.

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What do you mean when you suggest 'hold on for the ride'? Are you assuming the price will get back to what you paid?
What level of dividend income will you find acceptable in exchange for capital loss as the price continues to fall?

Julia said:

What do you mean when you suggest 'hold on for the ride'? Are you assuming the price will get back to what you paid?
What level of dividend income will you find acceptable in exchange for capital loss as the price continues to fall?

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Sorry, that was vague - I meant that, eventually, this will be converted into $100 equivalent of shares or cash, and you will get your original capital back. Dividend income accepted will depend on the individual's desired returns, I suppose.

herzy said:

Sorry, that was vague - I meant that, eventually, this will be converted into $100 equivalent of shares or cash, and you will get your original capital back. Dividend income accepted will depend on the individual's desired returns, I suppose.

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Some dividend shares are 60 or 80 years, some even perpetual. Some are convertible at the company's discretion. Some can stop paying dividend when the Board chooses to. It's not as risk free as they appear.

Look at the holders of Gunns and Paperlinx preference shares...

Plus, there is a price in terms of liquidity. A 60yr maturity it is not exactly liquid.

herzy said:

Sorry, that was vague - I meant that, eventually, this will be converted into $100 equivalent of shares or cash, and you will get your original capital back. Dividend income accepted will depend on the individual's desired returns, I suppose.

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As skc says, is it a mandatory conversion? Or can they step up? Can the company go broke in the mean time and if it does you can lose the lot? Are dividends cumulative or are they lost forever if they are not paid? And here is something to consider, what if the company is going real bad and their share price has dropped 70% or so and they decide to convert the preference shares into ordinary shares. What do you think would happen to share price if all those holders want to sell a dud company at once?

Each one of these preference shares have a different set of rules, you must read the PDS in order to be sure of when and what may occur. Most would probably be ok but you got to be on your guard on all the questions above.

Have a look at this thread, a lot of info there. https://www.aussiestockforums.com/forums/showthread.php?t=15124