Higher Income and Diversification All in One Niche Asset Class

Intro: 00:00
From Foyston Gordon and Payne, this is the Foyston for Thought Podcast, bringing context and perspective to the issues shaping markets and portfolios.

Gabriel Lopezpineda: 00:08
Welcome to episode four of the Foyston for Thought Podcast, recorded on June 29th, 2026. I’m Gabriel Lopezpineda, head of institutional at FGP Investments. And in today’s episode, we will be talking about an alternative asset class that many investors know about, but very few really understand. Preferred shares. With that in mind, Ryan Domsy, head of fixed income, is here with me to discuss the asset class.

Ryan Domsy: 00:33
Great to be here, Gabe. Thanks for having me back.

Gabriel Lopezpineda: 00:35
Thanks for joining me, Ryan. All right, let’s get started. I was at a recent conference and they actually spoke about generating income, growing their portfolio, and this asset class was actually brought up and there were tons of questions from the audience. So I thought, why don’t we get started by just touching a little bit on what the asset class is, preferred shares?

Ryan Domsy: 00:58
Yeah, it’s a great start. Preferred shares are interesting because they’re a hybrid security. This means that they have characteristics of other more common securities, stocks and bonds. Preferred shares have a set value similar to the par value of a bond, but instead of interest, preferred shares pay a dividend, which typically ranks ahead of payments on common stocks. This creates a security that is often considered to be equity, so it doesn’t impact a company’s debt and leverage metrics the same way a bond does. They aren’t bonds, they aren’t common stocks. Instead, they sit somewhere in between the two, offering characteristics of both. That hybrid nature is exactly what makes them interesting from a portfolio construction perspective.

Gabriel Lopezpineda: 01:42
And is this structure the reason why investors should look into preferred shares?

Ryan Domsy: 01:46
Well, the first reason investors should look into preferred shares is to consider the income. Preferred shares have historically offered higher dividend yields than both Canadian equities as well as investment grade bonds. That’s particularly relevant today. Many investors are continuing to search for income, and this is an option to get that income without taking on excessive credit risk. The attractive feature of Canadian preferred shares is that much of this income comes from high-quality issuers. In fact, the majority of the Canadian preferred share market consists of investment grade companies, including Canada’s largest banks, insurance companies, utilities, telecommunications firms, and energy companies. So investors simply aren’t reaching for yield. They’re often investing in some of Canada’s strongest corporate issuers while also receiving attractive dividend income.

Gabriel Lopezpineda: 02:35
So income is the first reason. But the structure you just mentioned of preferred shares also provide diversification benefits, right? Earlier I saw the 10-year correlation figures of the preferred share index versus the universe bond index, and the number was 0.26. I then saw the correlation of the Canadian composite index, and that figure was 0.7.

Ryan Domsy: 02:57
Yeah. The second reason investors should consider preferred shares is definitely diversification. Too often we see portfolios that are built using only traditional asset classes: equities for growth, bonds for income. Preferred shares introduce a third source of return. Now, historically, they’ve demonstrated relatively low correlation with both Canadian equities and Canadian bonds. That means they don’t necessarily move in lockstep with either asset class. And that’s exactly what investors should be looking for when building resilient portfolios. Adding assets that behave differently can improve diversification while potentially enhancing overall risk-adjusted returns.

Gabriel Lopezpineda: 03:32
Interesting. So given this is an alternative market, do investors need to lock in like they do when they invest in like private debt or other private markets?

Ryan Domsy: 03:41
No, a misconception about preferred shares is that they’re somehow an illiquid investment. In reality, preferred shares uh trade daily on either public exchanges or through institutional trading desks. They’re considerably more liquid than private asset classes. This is the third reason why investors should consider preferred shares when trying to build a resilient portfolio. For investors that value daily pricing and efficient implementation, this is a really important consideration.

Gabriel Lopezpineda: 04:10
So higher yields, lower correlations, and better liquidity seem to be a win-win to me. How big is this hybrid market and how is it structured?

Ryan Domsy: 04:18
Well, the hybrid market itself is larger than many investors realize. And this includes many different types of securities. Today it represents over 130 billion in market value. The market has many different structures that provide different interest rate and credit spread exposures. The structures include vastly different call options, extension options, and maturity dates. Each of these features make the securities behave differently as interest rates and market conditions evolve. Understanding these structural differences is one of the key advantages that active managers bring to the asset class.

Gabriel Lopezpineda: 04:50
So quite a sizable market. Given all of this, and especially the benefits, how come most investors have not looked farther into the asset class?

Ryan Domsy: 04:59
Well, I think it’s because it’s not as hot as equities and it’s not all over the news. The Canadian preferred share market remains relatively under-researched. It’s broad, it’s complex, and because of this, it’s not followed nearly as closely as traditional equity or bond markets. We like it as this creates inefficiencies for us. And inefficiencies create opportunities for active managers. Unlike US large caps, where hundreds of analysts may follow the same company, many preferred share issues receive very little, if any, attention. Different structures, call features, reset dates, credit considerations, and valuation anomalies all contribute to pricing discrepancies. These are exactly the types of opportunities that experienced active managers seek to exploit. Wow.

Gabriel Lopezpineda: 05:45
Well, thanks for the insight, Ryan. As you know, as investors continue navigating through uncertain times, higher interest rates, and evolving economic conditions, portfolio construction really becomes more important at the end of the day. And preferred shares really won’t replace traditional bonds, they won’t replace equities, but they can complement both. And sometimes the most valuable additions to a portfolio aren’t entirely new asset classes. They’re simply the overlooked ones. If you’d like to learn more about the FGP Preferred Share Strategy or discuss how preferred shares may fit within your portfolio, we’d be pleased to continue the conversation. Thanks to everyone for listening to Foyston for Thought. We’ll be back soon with another conversation on markets and investing.

Intro: 06:26
This podcast is intended for informational purposes only and does not constitute legal, tax, security, or investment advice, an opinion regarding the suitability of any investment, nor solicitation of any type. The opinions expressed are as of the date the podcast was recorded and are subject to change without notice. Foyston, Gordon and Payne is registered as a portfolio manager in every jurisdiction in Canada, an exempt market dealer in every province in Canada, an investment fund manager in Ontario, Quebec, and New Columbia, Labrador, and as an investment advisor in the United States. Voice and Gordon and Payne manages a number of pooled funds referred to as FGP pooled funds that are offered through a prospectus exemption to residents of Canada. The values of the FGP pooled funds change frequently. All investment involves risk. Unless otherwise stated, performance is on an annualized basis in Canadian dollars and is gross with management fees. Past performance is not indicative of future performance. This podcast may contain forward looking statements based on reviews, information, and assumptions as of the date of the recording. Listeners are cautioned that actual events may differ significantly. For further information on Foyston Gordon and Payne, please visit our website at www.foyston.com.