Assessing the Attractiveness of National Bank of Canada’s Series 42 Preferred Shares (NA.PR.G)

The National Bank of Canada’s Series 42 Preferred Shares (NA.PR.G) present a compelling case for income-focused investors navigating a rising rate environment. With a current annual dividend yield of 6.657% (as of August 2025) and a robust 5-year rate reset mechanism, these shares balance yield preservation with adaptability to macroeconomic shifts.

Dividend Stability: A Fixed Rate Until 2028

The Series 42 shares currently offer a quarterly dividend of $0.441 CAD per share, translating to an annualized yield of 6.657% at the current market price of $26.45 [1]. This yield is underpinned by a fixed rate of 7.056% for the period from November 16, 2023, to November 15, 2028, calculated as the sum of the 5-year Government of Canada Bond yield (4.286%) and a fixed spread of 2.77% [2]. This structure ensures predictable income for investors over the next five years, a critical advantage in a market where many fixed-income assets face downward pressure from rising rates.

Rate Reset Mechanism: Future-Proofing Yield in a Rising Rate Environment

Post-2028, the dividend rate will reset based on the prevailing 5-year Government of Canada Bond yield plus the same 2.77% spread. This mechanism aligns the shares’ yield with long-term interest rate trends, offering a natural hedge against inflation. For example, if the 5-year bond yield rises to 5% by 2028, the new rate would be 7.77% (5% + 2.77%), directly benefiting shareholders. This feature contrasts with traditional fixed-rate preferred shares, which may lose relative appeal as rates climb.

Credit Quality and Issuer Strength

The National Bank of Canada, a systemically important institution with $536 billion in assets [3], maintains strong credit ratings for its Series 42 shares: Baa3 (hyb) by Moody’s, P-3 (high) by S&P, and Pfd-2 by DBRS [4]. These investment-grade ratings reflect the bank’s solid capital position, evidenced by its recent Q2 2025 results, which included a 2% share buyback program and revenue growth driven by strategic transactions like the CWB acquisition [5]. The bank’s prudent capital management further supports its ability to sustain dividend payments, even in a challenging economic climate.

Conversion Flexibility: A Strategic Option for Shareholders

Holders of Series 42 shares also retain the right to convert their holdings into Series 43 (floating-rate) shares during specific windows. For instance, the most recent conversion period allowed shareholders to switch to Series 43, which ties dividends to the 3-month Government of Canada Treasury Bill yield plus 2.84% [6]. This flexibility provides an additional layer of protection against rate hikes, as floating-rate shares adjust more quickly to reflect market conditions.

Risks and Considerations

While the Series 42 shares offer attractive features, investors should note their non-cumulative dividend structure, meaning unpaid dividends are not carried forward in the event of a payout suspension. However, the National Bank’s strong capital position and recent performance mitigate this risk. Additionally, the shares’ yield, while competitive, is lower than some high-yield corporate bonds, necessitating a trade-off between yield and credit risk.

Conclusion

National Bank of Canada’s Series 42 Preferred Shares (NA.PR.G) stand out as a resilient income vehicle in a rising rate environment. Their combination of a current yield of 6.657%, a future rate reset tied to long-term bond yields, and the issuer’s robust financial health makes them a strategic addition to diversified portfolios. For investors seeking stability with growth potential, these shares offer a balanced approach to navigating the uncertainties of the current economic cycle.

Source:
[1] National Bank declares dividends [https://www.nbc.ca/about-us/news-media/press-release/2025/20250827-NBC-declares-dividend.html]
[2] National Bank of Canada Announces Dividend Rates for ... [https://www.nbc.ca/about-us/news-media/press-release/2023/20231017-nbc-dividend-rates-conversion-rights-series-42.html]
[3] National Bank reports its results for the Second Quarter of 2025 [https://www.nbc.ca/about-us/news-media/press-release/2025/20250528-NBC-second-quarter-results.html]
[4] Capital and Debt [https://www.nbc.ca/about-us/investors/capital-debt.html]
[5] National Bank of Canada Earnings - Q2 2025 Analysis [https://www.alpha-sense.com/earnings/na.ca]
[6] Brookfield Announces Reset Dividend Rate on Its Series 42 Shares [https://bn.brookfield.com/press-releases/brookfield-announces-reset-dividend-rate-its-series-42-preference-shares]