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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