And the listed preference share market has increased from R12-billion to about R20-billion in the past year as companies increasingly use them to raise capital.

"The average current dividend yield on preference shares is 6.6 percent, which is the equivalent of an 11 percent yield pre-tax (assuming a 40 percent marginal tax rate). The dividend yields are linked to the prime interest rate and the current yields range between 60 and 75 percent of prime. This equates into dividend yields ranging between 6.3 and 7.8 percent, which is particularly attractive in the current low yield environment."

He says preference shares in the last two to three years were predominantly issued by banks, but industrial companies have also started using this instrument of late.

Higher risk, but cumulative dividends

"Preference shares from industrial companies are generally higher risk than the bank’s preference shares, but their dividends are cumulative. This means, should these companies fail to pay a dividend, the dividend becomes payable at the next dividend payment date. Grindrod and Steinhoff are examples of these, yielding 7.6 and 7.7 percent respectively.

"The next big preference share issue is expected to be from Absa in the next two or three months. Primedia is the next industrial company that is expected to issue preference shares in the near term. The amount to be raised by Primedia is expected to be R150-million."

He says the preference share market’s reasonable capital growth (about six percent) over the past year shows the demand for these instruments, but says capital gain should not be the investor motivation as there is no reason to expect capital growth.

Preference share fund available

BoE Private Clients recently launched a preference share fund, which manages a basket of listed preference shares in the form of a fund.

"We carefully analyse the yield and risk relationships, and diversify over a number of preference shares, but focus predominantly on the bank preference shares.

"Our objective is to maximise after-tax income on a risk-adjusted basis for clients by investing in a portfolio of these listed pref shares.

"Analysing the current range of preference shares, we believe there is relatively good value offered by the Investec preference share, which yields around 6.7 percent currently.

"Another favourite in our portfolio is African Bank’s preference share. Although the amount issued is only R500m, the 7.7 percent yield is attractive."