The Motley Fool Discussion Boards
Investing/Strategies / Retirement Investing
|Subject: Re: Preferred Stocks||Date: 1/31/2011 6:59 PM|
|Author: joelcorley||Number: 68354 of 80175|
You wrote, RayVt, I incorporated your comments into the Preferred Stocks article on Investing Wiki.
I thought I would add a few things regarding the FAQ:
Some convertable preferreds are manditory convertable preferreds. Manditory means that the preferred will convert to common shares given a set of pre-defined conditions. The conditions and terms of the conversion are set forth in the prospectus and are not under the investor's control.
Sometimes a preferred's yield may be higher (or lower) than the bond rating would warrant because the market is anticipating or incorporating bad (or good) news or speculation. Rating agencies tend to be the last to adjust to news. However, the market isn't always right either, so do your own analysis.
Trust preferreds have been available for at least 15-20 years. How is this new? They are a consequence of the IRS rulings about Pass-through Investment Trusts such as REITs. Trust Preferreds likely began with REIT issues and expanded to other investment structures. Several of my own holdings were issued in the 1990's.
Third Party Trust assets can be more complex than just holding a bond series - those are the simplest structures.
For instance, synthetic CDOs are a type of third party trust as well. The underlying assets are a set of Treasury bonds and a set of credit default swaps issued by the Trust. This structure allows the synthetic CDO to simulate the gains and losses incurred by the insured bond holders without actually holding the original bonds.
Variable rate preferreds are often constructed in a similar fashion - by buying a fixed-rate bond from some issuer and then selling an interest rate swap contract. This lets the trust tie the dividend to changes in a benchmark interest rate.
Suspension of Dividends:
Quantum Online currently lists 133 suspended issues - both cummulative and non-cummulative. AFAIK, a unpaid dividends do not need to be paid for payments to a non-cumulative preferreds to resume. However, preferreds have a seniority interest superior to common stock, so generally the issuer may not pay a dividend to common - or any other equally ranked security - while dividends to that issue are suspended.
I've had an issue (OSBCP) suspended on me. The issue remains suspended. Unlike OSBCP, some of the suspended issues listed by Quantum Online are in bankrtupcy.
Generally, the tax treatment of dividends depend on whether or not the issuer paid corporate income taxes on the funds used to pay the dividends. Dividends paid from after-tax income are by definition qualified dividends.
This is actually a separate issue from suspension of dividends; however, they are related because an investment trust will loose its tax status if it fails to distribute at least 90% of net proceeds from investment activities. This means that for a trust to suspend payments to preferred shareholders, the trust's investments must also be suspend-able.
Capital Trust Preferred:
You should probably add a section for this type of security.
|Copyright 1996-2016 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|