Manulife Financial’s Preferred Shares Series 13: A Steady Dividend Boost Amid Rising Rates

Manulife Financial Corporation (MFC) has reaffirmed its commitment to income-focused investors with the declaration of a quarterly dividend of $0.396875 per share for its Non-Cumulative Rate Reset Class 1 Shares Series 13 (TSX: MFC.PR.K). This marks a notable increase from the prior rate, reflecting broader trends in interest rates and offering a timely opportunity for those seeking stable, high-yield investments.

The Dividend Reset: A Higher Income Floor

The dividend hike, effective September 20, 2023, stems from Manulife’s five-year rate reset mechanism for Series 13 preferred shares. The new annual dividend rate of 6.35% (equivalent to $1.5875 per share annually) was set by adding 2.22% to the five-year Government of Canada bond yield of 4.13%, measured on August 21, 2023. This reset aligns with the terms of the series, which adjusts every five years to reflect prevailing market conditions.

Compared to the prior rate period (2018–2023), this represents a meaningful uplift. While the exact rate for that period was not disclosed, historical context suggests the prior rate was likely closer to 4.75%, based on the series’ initial issuance terms. The 160-basis-point increase underscores the impact of rising bond yields since 2020, driven by central bank rate hikes to combat inflation.

Why This Matters for Investors

For income-focused portfolios, the Series 13 preferred shares now offer a compelling yield. At current prices of approximately $25.00 per share (the par value), the 6.35% yield is significantly higher than the 2.5–3.5% yields typical for many Canadian preferred shares. This makes MFC.PR.K competitive with high-yield corporate bonds while offering the security of a top-tier financial institution’s creditworthiness.

Moreover, the non-cumulative nature of these shares means dividends are paid only if declared, a risk mitigated by Manulife’s strong track record of consistent dividend payments. The company has maintained steady distributions across economic cycles, including through the pandemic and recent interest rate volatility.

Risks and Considerations

Investors should note two critical factors:
1. Non-Cumulative Structure: Unlike cumulative preferred shares, missed dividends are not owed to shareholders. This feature reduces the company’s obligation during periods of financial strain, but it also means payouts are never guaranteed.
2. Interest Rate Sensitivity: The next reset in 2028 could lower the dividend rate if bond yields decline. However, with rates likely to remain elevated in the near term, the current reset period provides a stable income floor until 2028.

Tax Efficiency and Liquidity

Manulife’s preferred shares are designated as “eligible dividends” for Canadian tax purposes, offering holders an enhanced dividend tax credit. This reduces the effective tax burden compared to non-eligible dividends or interest income. Additionally, the shares trade actively on the Toronto Stock Exchange, providing liquidity for investors seeking to enter or exit positions.

Competing with Floating-Rate Alternatives

Some investors may have opted to convert their Series 13 shares into floating-rate Class 1 Shares Series 14 (MFC.PR.S) during the 2023 reset period. The floating rate was initially set at 7.34% annually, slightly higher than the fixed rate. However, the floating rate’s volatility—tied to short-term Treasury bill yields—could make it less predictable for those prioritizing stable cash flows.

Conclusion: A High-Yield Anchor for Income Portfolios

Manulife’s Series 13 preferred shares now offer one of the most attractive dividend yields among Canadian financial institutions, particularly for investors seeking a fixed-income alternative in a low-yield world. With a 6.35% annual payout secured through 2028, these shares provide a reliable income stream with minimal credit risk.

However, the non-cumulative structure and interest rate sensitivity mean this is not a “set-it-and-forget-it” investment. Investors should pair these shares with other fixed-income assets to balance risk and consider rebalancing ahead of the 2028 reset. For those willing to monitor these dynamics, MFC.PR.K remains a standout option for generating steady returns in an uncertain rate environment.

Final dividend yield calculation: $0.396875 × 4 = $1.5875 / $25.00 par value = 6.35% annual yield.