Evaluating the TD Active Preferred Share ETF's Dividend Yield in a Rising Rate Environment

The TD Active Preferred Share ETF (TPRF.TO) recently declared a quarterly dividend of CAD 0.043, maintaining its reputation as a steady income generator in a challenging fixed-income market. With central banks globally balancing inflation pressures and economic growth, the question arises: Is TPRF's current yield sustainable, and does it offer enough value to warrant an allocation in today's rate-sensitive environment?

The Mechanics of Preferred Shares in Rate Cycles

Preferred shares typically offer higher yields than common shares but rank lower in priority during liquidation. Their fixed dividend structure makes them sensitive to interest rate movements. When rates rise, existing preferred shares with locked-in yields become less attractive, often causing their prices to drop. Conversely, falling rates can boost their value.

TPRF's strategy of actively selecting Canadian-listed preferred shares aims to mitigate this risk by focusing on issuers with strong balance sheets and stable payout histories. The ETF's current dividend yield of 4.53% (as of June 2025) is compelling compared to the 2.5–3% yields of government bonds, but investors must weigh this against potential price volatility tied to rate fluctuations.

Sustainability Check: Yield vs. Risk

The ETF's yield is supported by its 92.5% allocation to preferred shares, with top holdings in financial institutions and utilities—sectors historically resilient to moderate rate increases. However, the Bank of Canada's recent pause in rate hikes (after raising the benchmark rate to 5.0% in early 2025) has stabilized the preferred share market.

Historically, TPRF has shown resilience. For instance, during the 2022–2023 rate hike cycle, its NAV fell by ~15%, but dividends remained intact, and the fund rebounded by 28.65% in 2024 as rates stabilized. This pattern suggests that while short-term price swings are inevitable, the ETF's income stream may hold up if underlying issuers maintain payouts.

The Current Landscape: Risks and Opportunities

Pros:
- Attractive Yield: 4.53% vs. low-yielding bonds.
- Active Management: The fund's team can rotate into preferred shares of sectors least affected by rate changes (e.g., utilities vs. banks).
- Diversification: Exposure to 100+ issuers reduces company-specific risk.

Cons:
- Interest Rate Sensitivity: A resumption of rate hikes could pressure prices.
- Premium Pricing: TPRF trades at a 0.09% premium to NAV, leaving less room for price appreciation.
- Expense Ratio: 0.61% is moderate but higher than passive preferred share ETFs.

Investment Considerations

For income-focused investors, TPRF's yield is a standout feature. However, the ETF's suitability depends on one's risk tolerance and time horizon:
1. Short-Term Holders: Avoid if rates rise sharply. Monitor the Bank of Canada's next policy decisions closely.
2. Long-Term Holders: The fund's 7.54% average annual return since inception suggests it can compound value over cycles, provided dividends remain stable.
3. Portfolio Allocation: Pair TPRF with rate-hedged instruments (e.g., inverse rate ETFs) to balance volatility.

Conclusion

TPRF.TO's 4.53% yield offers a compelling income play, but its sustainability hinges on the Bank of Canada's next moves. While the ETF has weathered past rate cycles well, investors should remain cautious if rates climb further. For those willing to accept moderate volatility in pursuit of superior income, TPRF remains a contender—provided they stay nimble if the rate environment shifts.

In sum, TPRF is a hold for income seekers but requires active monitoring of macroeconomic signals. Diversification and a long-term view are key to navigating its yield's promise and risks.