Ever since last October, headlines have been trumpeting the notion that 2009 will bring the next Great Depression, akin to the “dirty thirties” of last century. The thought of another such economic downturn evokes a powerful emotional response in most of us, even though few people alive today were even born at the time of the last Depression. But the depression which followed the stock market crash of 1929 left such a deep scar in the psyches of our parents and grandparents that fear of those days seems to have left its mark on our collective unconscious.

It’s hard for us pampered consumers today to even imagine the challenges and insecurities of the Depression years. The legions of unemployed workers had no social net on which to fall back. Parents could not feed their families. Desperate men hit the road in hopes of finding work anywhere, only to find more desperation and destitution. Today, the worst decline in economic output we face is maybe 2 to 3%. Back then, it went down 25%, a quarter of the nation’s economic output down the drain. Unemployment stood at 25%, with no unemployment insurance, welfare or health care to soften the blow. And we think we have it tough today, with 6.5% unemployment (though it rose to 10.8% in the less-scary 1982 recession).

Worst of all, back in 1929, was the state of the stock market: from peak to trough, the precipitous drop was some 90%. Imagine if every dollar YOU owned today was reduced to a single dime.

With that kind of context, we can take comfort in this observation: that 2009 is more likely to bring emotional depression than the economic kind. Our financial pain is real, our sense of insecurity is real, and so is the distress of the unemployed. But those facts don’t add up to the bogeyman of a genuine Great Depression.

That bogeyman is, in fact, rather a misunderstood one. For instance, the common assumption is that the Depression was caused by the decline in stock prices. In fact, it’s the other way around: stock market drops are symptoms of economic decline, not their cause. What started out as a serious economic downturn was grossly mismanaged by the governments of that time. Rather than stimulating the economy and guaranteeing investor deposits, the administrations instead cut all spending, and let the banks fail, thereby allowing the situation to degenerate into the greatest fiscal rout of all time.

Although the government was largely responsible for the crash, investors and investment dealers weren’t blameless either. Their fate was, in large part, due to their imprudent use of leverage. Investors in 1929 were able to borrow up to ten times the amount of money they actually invested. Because of this, even the first small decline in the market wiped out most investors. The dealers were then forced to sell off the leveraged securities at any price they could get for them, thereby ensuring both their own failure and that of the whole system.

Despite the widespread economic carnage, though, there were some small pockets of sanity. Despite the 90% drop in stock prices, the drop in dividend yields was much smaller: only 50%. Any investor who was actually able to hold onto his stocks throughout the Depression, and who then re-invested the dividends, was made whole again in just seven years. Anyone who managed to hold onto their wealth became much better off as deflation drove prices down by 25%.

The dire events of 2008 may have got us down, both emotionally and financially. But we have to remember that to a large degree, all those news stories about a coming “Great Depression II” are playing on our visceral fears.

The numbers just don’t add up to a repeat of 1929. Rationally speaking, even the most dedicated foreteller of doom would have to agree: it’s unlikely that the current circumstances, uncomfortable though they may be, will seriously challenge the hardships of even the 1982 recession, never mind the disastrous “dirty thirties.”

In a relatively short time, investors will look back and realize that the time to buy is always when things look the worst. Today, with the ghost of the depression haunting the financial pages, we likely have the end of the downturn in sight.

Alan MacDonald is an Investment Advisor with Richardson Partner Financial Ltd. Alan helps investors with over $500,000 of assets make smart decisions about money. For more information please visit alanmacdonald.ca or e-mail Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson Partners Financial Limited is a member of CIPF.

When most of us talk about “stocks,” what we’re really referring to is common shares, an investment that involves buying a share of ownership in a business, and then (hopefully) sharing in the profits of that business, along with all the other shareholders. But there’s another option that’s often overlooked by most investors: preferred shares. Like common shares, preferred shares are also a form of equity in a company; but in practice, they behave much more like very long-term bonds than like ordinary stocks. They do have some obvious flaws. For one thing, they’re issued with a set dividend, which doesn’t increase if the company performs better than expected. For another, some classes of preferred shares, known as “perpetual,” have no maturity date—meaning that investors can be locked into the set yield for a long time if share prices fall.

Despite these apparent shortfalls, though, preferred shares are getting a second look nowadays from investors hit hard by the decline in common stocks. The big market drop of October 2008 dragged down just about every asset class, with the exception of government bonds and cash-equivalent investments such as treasury bills and money market funds. Preferred shares took a beating too, declining as fears of further financial catastrophe rose.

That’s unusual behaviour for this asset class. In a normal market, preferred shares typically decline when interest rates go up, and rise when interest rates go down. That’s because they normally trade based on their yield relative to the current interest rate environment. But now, preferred shares are suffering from investor fears that banks might default. Instead of going up in response to declining interest rates, as usual, the value of preferred shares has actually fallen.

For income-oriented investors, this may represent an opportunity. Right now, many such investors are caught between a rock and a hard place: they want to convert their growth investments to income, but they’re nervous about doing it at such low market levels. It doesn’t make sense to switch to a GIC after a 40% plunge in the stock market, yet they need the income to support their lifestyles.

Preferred shares can look like a smart option for investors with strong nerves. Because the income is high, and the shares are depressed, a return to normal credit markets would mean both high current income and an increase in the price of preferred shares. In many cases, preferred shares are trading at a 40% discount to where they were before the market took its October plunge.

Consider this example: a $25 Manulife perpetual preferred share issued in January 2006, with a dividend of $1.10 per share, is currently trading at $18. At that share price, the up-front yield is over 6%; and as a Canadian dividend, it also receives a favourable tax rate. (If, instead, you earned interest on an investment, you’d have to earn over 8.5% to keep the same after-tax amount). Another bonus: in the event of a company meltdown, preferred share dividends normally don’t get cut until after the common stock dividends are eliminated. That makes your income more secure.

Considering all these advantages and disadvantages, you can see that preferred shares aren’t for everyone. Their long-term nature and their interest-rate volatility mean that their prices can and do move around to an often nerve-racking degree. But for income investors wondering whether their stocks will ever come back, switching to preferred shares may just be a valid strategy to get dividend income today, without giving up the prospect of a capital recovery tomorrow.

Alan MacDonald is an Investment Advisor with Richardson Partner Financial Ltd. Alan helps investors with over $500,000 of assets make smart decisions about money. For more information please visit alanmacdonald.ca or e-mail Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson Partners Financial Limited is a member of CIPF.