BCE Preferred B shares continue to be one of my favourite holdings as they offer a great monthly dividend and opportunity for capital gains at current trading price of $18.11. At the beginning of June, I shared a post on Stock Twits why I thought BCE preferred B shares will outperform common shares of BCE over the next 12-18 months. As we close out the first month of June, this assumption appears to slowly be playing out.

Let’s examine why BCE preferred B shares can make a great addition to your portfolio:

1) Rising Monthly floating-rate dividend – As interest rates continue to rise in Canada so does the dividend payout. When Bank of Canada interest rates were rock bottom at 0.25%, the monthly dividend payment was $0.051 per month. At current rates this would have equated to a yield of 3.38%. However the recent rise in interest rates have increased the monthly dividend, nearly tripling to the current payout of $0.144 monthly. With interest rates expected to rise another 0.25% in July this monthly dividend payment could increase closer to $0.15. Expect the Bank of Canada to at least hold rates for a period of time after this decision which means you can comfortably collect a yield of 9.54% or greater!

2) Capital Gains Opportunity – Preferred shares are generally a lazy-man’s investment where the primary goal is to collect the dividend. When shares trade lower than their redemption value there is also a greater opportunity to receive capital gains as other investors seek safety in income or dividend producing assets. Fair value for these shares I believe are in the range of $23-24. On the lower end this would value the shares increasing 27% from their current price. The last time we saw these shares trading between $23-24 was August 2013. During this period the monthly dividend was only $0.063. Today’s current dividend is more than twice as much as the 2013 trading price when shares were above $23. When the market takes a volatile turn I believe investors could flock to more conservative assets such as preferred shares.

In March 2020 this particular preferred took a sharp drop to a low of $8.69. This was followed by a correction to more than $21 over a period of 23 months. During this period of time the preferred share collectively paid out $1.173 in dividends. Buying during these lows could have netted a capital gain of 141% over 23 months plus an additional 13.5% in dividends for a total return of 154.5%. Investors severely undervalued the price of these conservative preferred shares during the COVID breakout. Seeing how resilient these shares fared while continuing to reward investors in dividends reinforces why I believe these shares are still undervalued today. After all the current monthly dividend payout is 3 times higher than 2021 when the shares traded at $21.

3) Conservative & Cumulative Dividend Nature – Preferred shares are more conservative in nature than common share equity. While the capital gain appreciation is generally capped around the redemption price of the preferred, the steady and predictable dividend stream reinforces why investors are interested in them. In turbulent periods preferred shares may withstand their value. As well preferred shares have a higher liquidation value over common shareholders but rank below debt holders within a company. Special note regarding these preferred shares is the cumulative component of the dividend which means if the company withheld a dividend payment, these dividends must be repaid prior to common shareholders receiving dividends. One thing to keep in mind regarding these preferred shares is the lower trading volume compared to traditional shares. For this reason I recommend limit entries and exit.

At the time of writing this article I am long BCE preferred B shares.