Tuesday, February 10, 2009

Quality with Capital Gains

It is an interesting time in the market right now and a great time to learn and observe, but fairly stressful if you need to guarantee returns for your retirement fund.

Capital has long left the equity markets and gone the traditional "flight to quality" route in bear markets (US treasury bonds, considered to be virtually risk free and of highest quality, are trading at yield levels equivalent to investors saying "Just give me back what I put in"). Although it seems like the capital markets are offering 50% off fire sale prices across the board, investors are still cautious before putting their money back in, cherry picking equities which have been dumped by panicking funds, yet still have the potential for upside recovery.

Although the consensus (especially with the recent record January job loss numbers reported last week) is that the economy will get worse before it gets better, savvy investors are looking at different options for investing. One model of interest is mezzanine financing in the form of preferred shares (like those recently issued by North American Banks).

These investment vehicles offer dividends with stable and attractive yields as well as potential upside for capital appreciation (with the inclusion of conversion options). Also, for investors who want "green in the jeans" versus a "paper gain", the dividend is attractive for it's alternative tax implications (Canadian dividend income taxed differently and more favourably in some circumstances than capital gains).

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