Finance and Economic

In the past few weeks, Money 911 has looked at investments you can buy and manage on your own.

A portfolio of high-yield common shares – issued by banks, telecommunications firms, pipelines and utilities – can provide a double-digit average annual return over a period of five to 10 years.

That’s because your income comes from three sources: Dividend yield, dividend growth and capital gains when you sell the shares.

What if you find common shares too volatile?

Preferred shares are an option for risk-averse investors. They’re a halfway house between stocks and bonds.

"Preferred shares are called ‘preferred’ because their dividend must be paid before the common stock dividend (if any) is paid," says Keith Betty, author of an online investing guide, Shakespeare’s Investment Primer, www.shakesprimer.com.

Unfortunately, preferreds can be complicated. They come with a bewildering array of features that makes selection difficult.

Author Gordon Pape includes preferred shares in a portfolio for conservative investors. But he thinks they bear close scrutiny.

"They’re attractive because they are usually (but not always) stable in price, their distributions are reasonably predictable and they are eligible for the dividend tax credit, which makes them very effective in non-registered accounts," he says in his new book, Sleep-Easy Investing (Penguin, $26).

"The problem is that they come with all kinds of small print that sometimes catches even professional money managers by surprise."

A common irritant is a redemption clause, which allows the issuer to buy back the preferred shares at specific times for predetermined prices.

So, why invest in preferred shares? I asked James Hymas of Hymas Investment Management Inc. in Toronto, who runs a fund for high-net-worth investors, publishes a newsletter about preferred shares and has a website, www.prefblog.com.

"The common share investor is taking the first loss," he says. "Common shares provide a higher expected long-term return, but it could be a bumpier flight."

He points to U.S no fax payday advances. banks, hit hard by the credit crunch. News reports indicate that up to half of them may be cutting their dividends this year.

Preferred shares have a somewhat more secure dividend than common shares. Moreover, they trade in a tight price range, generally with no big gains or losses.

Suppose you have $10,000 or more to invest in preferred shares. Hymas recommends buying at least three issues with a top-quality credit rating, such as Pfd-1 from Dominion Bond Rating Service.

"If you can afford five to six issues, you can get a Pfd-2. And with 10 different issues, I wouldn’t mind too much if one was Pfd-3."

You don’t have much choice when it comes to sectors. A large proportion of preferred shares are from banks and insurance companies.

"With Canadian preferred shares, you have to resign yourself to a high exposure to financials," he says. "You can make allowances for that in the rest of your portfolio."

Smaller investors can buy a few preferred share funds that trade on the Toronto Stock Exchange.

The Diversified Preferred Share Trust is managed by Sentry Select and trades under the symbol DPS.UN. It has a year-to-date return of 1 per cent (after getting hit hard by the credit crunch last fall).

The Claymore S&P/TSX Preferred Share ETF trades under the symbol CPD. Its net asset value is down almost 4 per cent in the past year, but it has a current yield of 4.7 per cent, paid quarterly.

Money 911 takes a break next week and comes back on June 22, when we’ll look at how to reinvest your dividends for compound growth.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email.

Source

Residential Capital LLC, the mortgage lending unit of GMAC LLC, said Tuesday it needs more than three times more cash to stay in business than it estimated just weeks ago.

ResCap estimates it now needs about $2 billion in cash by the end of June to meet liquidity demands, according to a regulatory filing with the Securities and Exchange Commission. It previously estimated it needed just $600 million by the end of the month.

"The change in the number is not a positive development," said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics. "ResCap may have to restructure."

But, ResCap is not the only company in this predicament, Whalen said. Financial firms across the board are continuing to revise loss estimates and will likely do so throughout the year, he said.

Whalen said ResCap’s potential losses could grew even further, requiring more than the $2 billion it now needs because he does not expect the residential and commercial lending markets to bottom out until 2009.

As the mortgage lending market deteriorated rapidly, starting in the middle of 2007, ResCap posted large losses. It continues to lose money, putting it in danger of failing to meet financial obligations. ResCap lost $859 million during the first quarter.

In an effort to meet the cash requirements, ResCap increased the size of an existing credit facility with parent GMAC (GOM) and is selling some of its assets to GMAC and its majority stakeholder, private equity firm Cerberus Capital Management.

On Monday, Cerberus denied reports that it recently sold an equity stake in GMAC. Cerberus led a group of investors that purchased the financial unit of General Motors Corp cash advance. for $7.4 billion in 2006. A spokesman for Cerberus said the private equity firm has not reduced its equity stake in GMAC since it completed the acquisition.

GMAC’s former owner, General Motors, which still holds a large minority stake, is also facing its own struggles. On Tuesday morning, GM said it will shut down four truck and SUV plants in North America.

In its effort to raise the necessary capital, ResCap on Tuesday will draw $450 million from an expanded credit facility with its parent, according to the regulatory filing. The expanded facility allows ResCap to borrow up to $1.2 billion from GMAC. The previous credit facility allowed for borrowings of up to $750 million. The advance rate on the facility was also expanded to 85% from 50%.

ResCap will sell a wide variety of assets to GMAC and Cerberus, including its resort funding division. GMAC will acquire the resort funding business for an initial price of 90% of the businesses book value, with a final sale price of fair value for the division. Fair value will be determined by a third-party appraiser.

An initial deposit of $250 million, representing about 74% of the division’s book value, will be paid Tuesday.

Cerberus will purchase ResCap model home assets with a value of about $475 million as part of the asset sale. Cerberus will also purchase an additional $300 million of mortgages and mortgage-backed securities.

ResCap will also receive servicing advances from GMAC Commercial Finance.

The mortgage lender is also in the midst of a debt exchange program that will help extend the mid. "You know yesterday it was panic here. Usually we miss important things in panic." 

Source

Fears that the credit crisis is back rattled financial markets on Tuesday as a newspaper report added to previous woes by suggesting that U.S. giant Lehman Brothers may need to raise nore capital.

Equities were lower, bonds got a boost from investors seeking safety and the Japanese yen strengthened in a display of investor risk aversion.

The Wall Street Journal reported that Lehman Brothers (LEH.N: Quote, Profile, Research) may raise $3-$4 billion in fresh capital and suggested the bank could post its first quarterly loss since going public.

The report followed Monday’s Standard & Poor’s debt rating downgrade of three big securities companies and the ouster of number four U.S. bank Wachovia’s (WB.N: Quote, Profile, Research) chief executive. Monday also saw UK mortgage lender Bradford & Bingley (BB.L: Quote, Profile, Research) slash its emergency fundraising price to get a private equity lifeline.

“We don’t seem to have left all the problems with the banking system, as looked likely a few weeks ago,” said Edward Menashy, economist at brokerage Charles Stanley.

Investors had been looking past the credit crisis that hit last year when U.S payday loans. subprime mortgages began to unravel, focusing instead on slowing economies and inflation fears.

MSCI’s main world stock index .MIWD00000PUS was down around 0.1 percent and the emerging markets equivalent .MSCIEF shed nearly 1 percent.

European stocks FTEU3 were slightly lower. Japan’s benchmark Nikkei average .N225 had earlier closed down 1.6 percent. 

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