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URL:  http://boards.fool.com/the-complexities-of-preferreds-make-it-a-29356388.aspx

Subject:  Re: Anyone home? Date:  6/13/2011  9:41 AM
Author:  Rayvt Number:  36 of 50

The complexities of preferreds make it a potentially treacherous path for the novice. Study needs to be undertaken for every issue considered and you need to understand the risks and potential behavior of the issue before you buy. Failure to do so could result in some nasty surprises.

With that said, I think there can be significant value found in preferreds, if you know what you're looking at.


Wow! Great explanation of the risks & need for DD.

I would add that the most likely danger for a novice pref investor is reaching for yield and not paying enough attention to the safety of the issuer.

I think that most of the risk can be avoided by sticking to a few simple rules. Credit rating of Baa3 or above (i.e., Moody's investment grade). Cumulative. Under par. US corporation. Only listed issues, no OTC issues. The book I mentioned has a couple more. Only if the company has never skipped a dividend, never suspended. Only $25 par. No floating rates. No convertibles.

Going by these rules more-or-less automatically avoids most of the risky issues without requiring you to do a lot of work, but still gives you a reasonable number of choices. Sure, they also occasionally knock out some otherwise good candidates (like WFC-L a couple years ago), but they knock out almost all of the bad choices, while still leaving you with a bunch to choose from.

The CDx3 web site screener shows a total of 1075 preferred stocks. After applying all their rules, only 47 are left. That's plenty of candidates. As of Friday, 7 were at or below par and 40 were over par.
Of these 7, the current yields ranged from 6.66% to 7.37%, and averaged 6.99%

From this list of 7 (or 47) you can then do further DD at quantumonline, etc. and decide which issue(s) you want to buy.
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