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Online Share Trading

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Preference shares

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Happy
Contributor
Does anybody here own preference shares to generate income and are there any pitfalls to watch out for if one wants to buy these?
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10 REPLIES 10
Picky
Regular Contributor
moves with interest rate cycles
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Happy
Contributor
So you would move to cash if interest rates are high and back to prefs if they drop (as is the case now)?
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Picky
Regular Contributor
yip, also check out the liquidity of selected pref shares
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SimonPB
Valued Contributor
well why ?? your rates on prefs will also be dropping now, or have been since the mpc started their rate cut cycle ..
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Picky
Regular Contributor
highe int rate better payout, but I think there is better options than prefs at the mo
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geordie1
Super Contributor
My view is that the reason you get into prefernce shares is to earn hightax free(well tax is levied at 10% before it reaches you) income.So if you already are taxed at 40% you have taken advantage of your full tax allowance in terms of interest earned in any one tax year and you want to earn high income but are prepared to see minimal capital growth and in some cases a slight fall(depending on what you pay) then preference shares are a suitable vehicle.Bear in mind they are not totally risk free although they do get 'preference' over normal shares.If the company that issues them goes under then they can become worthless.This explains the difference in returns between the different prefernce shares available-a prefernce share considered higher risk by the market will tend to pay a higher return-if you consider the market incorrect you can sometimes pick up a higher return preference share for what you consider a' bargain '.Not for me at this moment in my investment plan but I did investiage them.
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Mighty_Mouse
Occasional Contributor
Pref Shares work for me - even with lower interest rates the returns are better than virtually all equity divs. Suggest you choose carefully, I pretty much only take the ones that are "Cumulative" (the new type of linked prefs) This means that, firstly, the pref distrbution has to be paid ahead of the ordinary div, and secondly, if they miss a distribution, they become cumulative. Prefs issues by the banks are fairly liquid, and less risky, but if you consider a Netcare or Steinhoff Pref risky, then you should be investing in the money market! Hope this helps
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Happy
Contributor
But if you look at a pref share such as SHF, they have a 13% div yield wich is way better than money market, accepting that the share is more risky and illiquid (is there such a word?), why would money market be better?
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Mighty_Mouse
Occasional Contributor
I think you missed the point I was trying to make - I am absolutely saying that the return on the Prefs named is way better than Money Market, and I do not believe that the risk is great, as was implied by certain other forumites that resoponded to your query. I was being tongue-in-cheek in stating that if you feel that the risk on Prefs is too high, then one should invest in the money market and not the share market. You are absolutely correct in stating the return on Prefs is currently well over 10%. If and when rates rise again, the returns will mittor those rates. I do not believe that there is too much risk for the reasons I outlined, as I say, they work for me as I am prepared to take a risk on the cumulative ones, specially as the divs are tax free in our hands.
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Happy
Contributor
Thanks for the info, I had a dof out when reading your post, upon rereading I clicked the jest.
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