Power Financial's 5.5% Preferred: A High-Yield Opportunity Amid Rate Volatility?

Power Financial Corporation’s 1ST PFD-R 5.5% preferred shares (PWF.PR.R) offer investors a compelling 5.7% yield in a low-interest-rate environment. However, the allure of this dividend-paying instrument must be balanced against risks tied to interest rate fluctuations and issuer stability. For income-focused investors willing to navigate these challenges, these shares could prove a rewarding addition to a diversified portfolio.

The Allure of the Yield

The 5.7% current yield of PWF.PR.R stands out in a market where traditional fixed-income instruments like government bonds offer paltry returns. This yield is supported by a $25 par value and a $1.375 annual dividend paid quarterly. Unlike many preferred shares, PWF.PR.R trades below par at $24.60, amplifying the yield due to the inverse relationship between price and yield.

Interest Rate Risk: A Double-Edged Sword

The biggest threat to PWF.PR.R is interest rate sensitivity. Preferred shares typically decline in value when rates rise because their fixed dividend becomes less attractive compared to newer issues. Conversely, if rates fall, Power Financial could redeem these shares at par ($25) at any time, locking in lower-cost funding.

This call feature, while a risk for holders, also acts as a safety net. Investors are protected from permanent capital loss because the issuer can’t force a sale below par. However, if called, investors would need to reinvest proceeds at lower prevailing rates.

Issuer Stability: The Foundation of Confidence

Power Financial’s A+ corporate credit rating (Standard & Poor’s) and stable outlook underscore its financial resilience. As a subsidiary of Power Corporation of Canada, it benefits from a diversified portfolio spanning insurance, asset management, and energy. While no specific credit rating is assigned to PWF.PR.R, the corporation’s strong balance sheet and diversified revenue streams reduce default risk.

Key Risks to Consider

1. Non-Cumulative Dividends: Missed payments are not owed, so investors face income disruption if the issuer suspends dividends.
2. Perpetual Structure: No maturity date means no guaranteed return of principal unless called. Investors must rely on the issuer’s creditworthiness indefinitely.
3. Market Volatility: Geopolitical tensions or economic downturns could compress yields, depressing share prices.

Why Act Now?

• High Yield in a Low-Rate World: The 5.7% yield outperforms most fixed-income alternatives.
• Built-In Floor: The call feature ensures a minimum $25 return if rates drop, limiting downside.
• Strong Parent Support: Power Financial’s financial strength provides a reliable anchor for dividends.

Conclusion: A Calculated Bet on Income

PWF.PR.R is not without risks, but its combination of above-average yield, issuer credibility, and call protection makes it a strategic play for income investors. For those with a long-term horizon and the stomach for rate-related volatility, this preferred share offers a compelling entry point.

Act swiftly: With yields hovering near 5.7%, the window for locking in this income stream may narrow as rates stabilize or rise.