QUITE often clients seek my advice for a stable/conservative investment opportunity that offers high returns, which is really an oxymoron when you think about it because typically higher risk equals higher returns. That being said, after examining each individual's risk tolerance, investment objectives and time horizon, preference shares are often a suitable option.

While not typically on most people's radar screen like shares of say Apple Inc or perhaps the latest initial public offering (IPO), when you consider the low interest rate environment locally and the market instability globally, preference shares are a viable alternative for those seeking stability as well as income. They are great conservative plays as they do not usually experience price volatility. Whether your goals are for savings, retirement or college tuition, dividends provide steady cash flows quarterly, semi-annually or annually.

To help you understand the potential benefits of this asset class let us review some of the basics. There are typically two types of preference shares: straight preferred or convertible. Straight preferred pay a fixed dividend and are issued in perpetuity or have no maturity date. On the other hand, convertible shares contain the same properties as straight, but can be converted to common stock. Most issuers of preference shares tend to be financial institutions.

Preference shares, specifically straight preferred stock, are considered hybrid instruments because they contain features of both bonds and stocks. They pay a fixed quarterly dividend (like a bond), but the price can go up or down (like a stock) and therefore you may be able to reap capital gains in the event of price appreciation while still receiving quarterly income in the form of a dividend. This class of shares usually garners a better equity credit rating than straight debt since it is perpetual.

To obtain preference shares is fairly simple, because you can buy or sell them on an exchange just like a stock. An advantage of preference shares is that the issuing company must pay the stated dividend rate prior to paying any dividends on common stock. Another feature of preference shares is that they may have a call option. This means that the issuing company has the right to repay the holder of the shares a set price per share by a particular date.

An investor who purchased the shares below the call price would benefit from a capital gain. For example, if you invested $10,000 in preference shares at $10 per share and the call price is $13 per share a few years later, the gross capital gain would be $3 per share or $3,000. Notably, this return is separate and apart from the dividends that would have been received over the holding period of the instrument.

So, with myriad companies offering preference shares, which should you choose? The Bank of Nova Scotia (BNS) Preferred Shares, Series 15 with a coupon of 4.5 per cent or HSBC Bank Canada Preferred Shares, Series C with a coupon of 5.1 per cent are among the many options. While, both instruments are taxable at 15 per cent, they are liquid investments.

HSBC Holdings plc, Europe's largest bank by market value, is the holding company for the HSBC Group and provides a variety of international banking and financial services worldwide. Its international network covers 87 countries and territories in six geographical regions. Credit rating agency Fitch Ratings on December 12, 2011, affirmed HSBC's Double-A credit rating and its stable outlook, highlighting the bank's resilience despite a recent raft of other banks being downgraded by ratings agencies.

The affirmations reflect "HSBC's geographically diversified business model, management's generally low risk appetite, conservative liquidity and funding positions of the group's local franchises and its solid capitalisation," Fitch said. "These traits have served HSBC well for many years and provide the group with a solid base to weather the weaker global economic outlook and continuing market turbulence."

Similarly, BNS is a diversified financial institution offering a range of products and services, including retail, commercial, corporate and investment banking in some 50 countries worldwide. The bank has four business lines: Canadian Banking, International Banking, Scotia Capital and Global Wealth Management. Canadian Banking provides a range of banking and investing services to more than 7.6 million customers across Canada, through a network of 1,024 branches and 2,998 automated banking machines (ABMs).

On November 9, 2011, Standard & Poor's (S&P) affirmed its 'AA-/A-1+' long and short-term issuer credit ratings on BNS with a stable outlook. S&P stated that "our ratings on BNS reflect the bank's strong business position, adequate capital and earnings, strong risk position, and average funding and adequate liquidity, as our criteria define these terms. The ratings on BNS benefit from a one-notch uplift for potential extraordinary Government support in a crisis. We expect the bank to continue to generate consistent earnings supported by its stable retail banking operations and manageable loan losses."

So as you re-evaluate your financial goals for 2012 amid global market volatility, consider these preference shares for stability in your portfolio. Be proactive for the new year and call your wealth Advisor today.

Nicole Ziadie, is the Manager, Wealth Division at Stocks & Securities Ltd. You may contact her at nziadie@sslinvest.com

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