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Ben Felix - Why I Prefer to Avoid Preferred Shares | Common Sense Investing

Thumbnail of the video “Ben Felix - Why I Prefer to Avoid Preferred Shares | Common Sense Investing”
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Author: Ben Felix
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-16 10:03 UTC

Short Summary

Main recommendation: Avoid preferred shares; Ben Felix does not recommend them in the portfolios he oversees, and says they carry risks that outweigh their benefits for most investors. If an investor still chooses to hold them, the video's advice is to limit them to taxable accounts, cap them at 5 to 15 percent of the portfolio, diversify broadly, and avoid buying individual issues.

Key Points

  • Preferred shares rank below bonds but above common stock in bankruptcy, and they do not share in company growth; their return is mostly a fixed dividend.
  • They behave like very long-term bonds with no maturity date, which tends to produce poor risk-adjusted returns and exposes holders to long-run credit risk.
  • The call feature creates asymmetric risk: issuers can redeem at issue price when rates fall or credit improves, capping upside while the downside stays.
  • Companies often issue preferred shares because they cannot add more debt, and they can suspend preferred dividends at their discretion, unlike bond interest payments.
  • Possible benefits are higher yields than corporate bonds, eligible-dividend tax treatment for Canadian investors, and returns imperfectly correlated with other asset classes.

Details Worth Noting

  • Concrete instructions: If you still choose to invest in preferred shares, hold them only in taxable accounts, keep them between 5 and 15 percent of your portfolio, diversify broadly rather than holding a few issues, and avoid purchasing individual preferred shares because each issue is complex. Ben Felix's PWL colleagues Dan Bortolotti and Raymond Kerzérho recommended this approach in a 2015 white paper, which Ben references as the basis for the advice.
  • Fixed-reset preferred shares, the most common Canadian type, pay a fixed dividend for five years, then reset to the five-year Government of Canada bond yield plus a spread, with holders able to accept the new rate or convert to floating. This reduces interest rate risk but does not remove it.
  • During 2015, rate-reset preferred shares fell sharply, with the S&P/TSX Preferred Share Index dropping 20 percent between January and September 2015.
  • Larry Swedroe's book The Only Guide to Alternative Investments You'll Ever Need is quoted as saying the risks make preferred stocks inappropriate for individual investors.
  • The video is part of a series; the speaker also does not recommend high-yield bonds in the portfolios he oversees.

Bottom Line

Preferred shares combine bond-like long-term risk, equity-like subordination, and capped upside, so their yield premium may not compensate investors for the added risk and complexity.