When Even The Market Darlings Continue To Disappoint

While preference shares do not come without risk, they do offer potential in a lacklustre investment environment.

- Simon Brown

Trying to find something that is going up in our current market is proving almost impossible. It feels like there is nowhere to hide. And no matter what valuations you buy at, the price just continues lower. Even the market darlings of the last few years are out of favour.

But there is still money to be made. We just need to look in different corners.

The corner I am talking of here is preference shares. These are debt instruments issued by listed companies, and are a loan to the company at the time of listing. They then pay regular dividends that are linked to the prime interest rate. Being dividends, they attract dividend withholding tax of 20%. What we are seeing is some great yields from the non-financial preference shares, with some over 10%. This is potentially a great place to hide while our market decides what it wants to do.

What is also important is that while a preference share will be issued at an underlying value (most often R100), it trades free without a market maker. You can therefore buy it at a discount to its actual value, enhancing the yield.