The Jamaica Stock Exchange building on Harbour Street. Compared to common stocks, a preference share is a security that provides investors with fixed dividends over the life of the share.
IF YOUR outlook for the Jamaica Stock Exchange (JSE) is uncertain, then you might be interested in an investment in preference shares. These types of shares can be seen as the middle ground between the relative safety of fixed interest instruments and the growth potential of the stock market.
Investors, currently in two minds about maintaining exposure to the JSE or converting their funds into the safety of traditional money market investments until stock market correction worries subside, should consider an investment in preference shares.
A preference share is a security that provides investors with fixed dividends over the life of the share. They are often considered hybrid securities due to their debt and equity features.
The debt feature of a preference share is that it pays a fixed dividend. This is tantamount to the interest paid on a particular tenor of a debt instrument. It is also equity as it is considered share capital but not classified as "equity" due to the absence of voting rights. Another interesting fact to note is that, in the event of liquidation payments, preference shareholders will rank ahead of ordinary shareholders.
The fixed rate offered on these shares is in the form of a dividend, and thus it is reliant on the company who has issued the shares making a profit. Dividend is not taxed in Jamaica, so the dividend received is a major incentive for investors in which tax minimisation is paramount to their portfolio.
Preference shares may be convertible in that it can either be converted into ordinary shares of the issuing company or, in some circumstances, the face value may be repaid in cash upon maturity. Companies issue convertible notes as an alternative to a debt issue. The advantage of such a security to the company is that the interest cost is usually below that of a debt issue. To the investor there are also many advantages.
Preference shares experience less price volatility as the dividend is fixed and usually higher than other stocks and even some fixed income investments. They are relatively more attractive in a falling interest rate environment because no tax is paid on dividends and as such, investors yield some tax advantages.
The down side to preference shares is that, holders of these shares cannot vote, capital growth is limited and it is not completely sheltered from market volatility. Preference shares are less attractive in a rising interest rate environment.
Preference shares really embody the best that the equity and fixed income markets have to offer. Not only will you receive a fixed income that you can depend on and plan around, but since it is tax free, this means that the income you receive from the preference shares is probably more than what you are currently receiving on your money market instruments after tax.
Contact an NCB Capital Markets wealth adviser at 1-888-4WEALTH or info@ncbcapitalmarkets.com.
Taken from The Sunday Gleaner, July 16, 2006
