Sell or Hold Canadian Preferred Shares After Losses?

To sell or hold preferred share losses

Concentrating heavily in any single asset class raises risk, and that principle applies to fixed income as much as to equities. Many Canadian investors learned that lesson recently when segments like preferred shares and private mortgages declined significantly. Preferred shares are a small slice of the total fixed income market—typically under 5%—so holding substantially more than that in preferreds would be considered an overweight position and deserves scrutiny.

Preferred shares vs. common shares

Preferred shares behave differently from common shares and from traditional bonds. Common shares represent ownership in a company and their price reflects company profitability, growth prospects and market sentiment. Preferred shares sit between common equity and bonds: they usually pay a set dividend, and in a bankruptcy they rank behind secured and unsecured bondholders but ahead of common shareholders.

Unlike most bonds, many preferred shares are perpetual and have no fixed maturity date. Some issues are callable, meaning the issuer can redeem them at a predetermined price. Preferred dividends resemble bond interest in that they are typically fixed or formula‑based, but they are paid as dividends. For Canadian taxable investors holding preferreds in non‑registered accounts, the tax treatment of eligible dividends can be more favorable than interest income, which explains part of their appeal.

Are preferred shares a good investment?

Preferred shares have recently underperformed as interest rates rose. When market interest rates climb, older fixed‑rate instruments with lower coupons become less attractive, pushing their market prices down. The same dynamic affects bonds and preferred shares: newer issues offer higher yields and draw investor demand away from older, lower‑paying securities.

Index performance for S&P/TSX preferred share benchmarks has been modest over recent periods. For many retail investors, returns in mutual funds or ETFs that include preferred shares will be reduced by fees, which can further dampen outcomes compared with holding individual issues. When assessing whether preferred shares suit your portfolio, compare their current yield and volatility with alternatives such as high‑rate guaranteed investment certificates (GICs), bonds or dividend‑paying common shares.

What are preferred shares?

Preferred shares come in several common structures. Understanding which type you own helps you evaluate interest rate sensitivity, call risk and income stability.

1. Rate reset preferred shares

Rate reset preferred shares became popular after the 2008–2009 financial crisis. They typically reset their dividend rate every five years based on a premium over the five‑year Government of Canada bond rate. Because many Canadian preferred issues are rate resets, this segment represents the largest share of the market and is sensitive to changes in medium‑term interest rates.

2. Perpetual preferred shares

Perpetual preferreds pay a fixed dividend indefinitely and do not reset. Their yield is set at issuance and remains until the issuer calls them (if callable) or until market prices change. These issues account for a meaningful portion of the market and can be more sensitive to shifts in long‑term rates and credit perceptions.

3. Floating or variable rate preferred shares

Floating or variable rate preferred shares adjust their dividend more frequently—often quarterly—based on a short‑term benchmark such as the 3‑month Treasury bill. These issues typically have lower interest rate risk than fixed or perpetual preferreds because their income tracks short‑term rates more closely. Together with convertible preferreds, they represent a small portion of the overall market.

4. Convertible preferred shares

Convertible preferred shares can be exchanged for another class of securities, most commonly common shares, under predefined terms. This conversion feature can add upside if the issuer’s common shares appreciate, but it also changes the risk and return profile compared with straight preferreds.

Preferred share indexes for Canadian investors

The preferred share market in Canada is concentrated in a few sectors—financials, energy and utilities make up the bulk of the index. Financial issuers, particularly banks, tend to be the largest weight. The index distribution yield can appear attractive—often in the 5%–6% range—but those yields should be compared to risk‑free alternatives and to the possibility of capital losses if rates rise or credit perceptions worsen.

Yield attractiveness should be measured alongside volatility and credit risk. For example, high yield in preferreds is not a substitute for guaranteed returns available from high‑rate GICs or carefully selected bonds, which carry lower market risk.

What to do with preferred shares at a loss

If your preferred shares are held in a taxable, non‑registered account and currently carry an unrealized loss, selling can create a capital loss that may offset other capital gains in the same tax year. Tax‑loss selling (or tax‑loss harvesting) lets you claim capital losses against capital gains, and unused losses can be carried back up to three years or carried forward to offset future capital gains. This can make selling at a loss more attractive from a tax perspective.

Beyond taxes, make an investment decision based on the current value and future prospects of the holding, not on the purchase price. Ask yourself: if I had this cash today, would I buy these preferred shares again at the current market price? If the answer is no, selling is worth serious consideration. If you remain overweight in preferred shares relative to your target allocation, trimming the position can improve diversification and reduce interest‑rate and sector concentration risk.

Avoid holding securities solely to “get back to even.” Consider alternatives that better match your risk tolerance and income needs—whether that means moving to short‑term bonds, GICs, high‑quality dividend stocks, or a diversified fixed‑income ETF with appropriate duration and credit exposure.

Further reading on tax‑loss selling and related topics

• ‘Tis the season for tax‑loss selling in Canada
• What is tax‑loss harvesting?
• Selling stocks at a loss in a TFSA: what it means for your contribution room
• Should you sell investments at a loss to pay off debt?