Today i purchased the preference shares AV.B (Aviva) and CPBB (The Co-operative Bank) at 123.5p and 132.7p respectively.
The combination of my search for yield and growing cash surplus has led me to take the plunge into the world of preference shares. I liken these to corporate debt, generating a fixed yield providing the businesses remain solvent enough to meet interest payments.
Both investments are irredeemable. This means the interest should be paid throughout the life of the business, unless for any reason they become unable to meet payments. Aviva is cumulative, meaning any missed payments should be subsequently made up. Co-op is non-cumulative, meaning they have no obligation to make up missed payments at a future date.
In order to balance risk i have invested in one insurance business (Aviva), and one bank (The Co-operative Bank). Aviva is a large insurance business with an established track record of providing good returns to shareholders, despite recent challenges. The Co-operative Bank is a relatively small bank focused on the traditional activities of loans & deposits. It has also been struggling recently but it has a reasonable core retail business.
Based on the purchase prices, these should both yield about 6.8% to perpetuity. Higher yields were available from other financial institutions (eg Lloyds Banking Group, Santander), but i decided to sacrifice some yield in the hope of lower risk.
I don't intend for this to become a large part of my portfolio, rather an attempt to add some additional yield, risk & diversity to my passive income streams.
That's a better yield than you can get on most bonds (unless you take on a high degree of credit risk).
ReplyDeleteI assume the interest rate is fixed and they are non-callable?
Cheers
traineeinvestor
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ReplyDeleteHi there, yes both have fixed coupons, pay dividends twice yearly and are non-callable.
ReplyDeletePref shares do seem to offer some of the highest fixed rates going, however apart from the credit risk, they tend to be quite illiquid, resulting in high transaction costs (ie a high bid offer spread). This isn't really a problem though if you don't plan to buy and sell regularly.
Cheers