Anyone out there still own pfds?
BenSC,You wrote, Anyone out there still own pfds?I do. Several in fact. The credit freeze was a great opportunity, wasn't it?- Joel
Joel,That was meant somewhat tongue-in-cheek as a means to hopefully generate some discussion. I've actually only in the last week started to educate myself on preferred stock and am evaluating them to perhaps add some to my taxable d-g portfolio and as a staple in my Roth-IRA.Would you care to recommend any preferreds for me?-Ben
BenSC,You wrote, That was meant somewhat tongue-in-cheek as a means to hopefully generate some discussion. I've actually only in the last week started to educate myself on preferred stock and am evaluating them to perhaps add some to my taxable d-g portfolio and as a staple in my Roth-IRA.What's a "d-g portfolio"?Also, Would you care to recommend any preferreds for me?What risks are you willing to consider? Most preferreds are considered poor credit risks. Also some preferreds are convertible to common, some are fixed rate, some are tied to an index, some are short-term, some are long-term, some are ultra-long term, some have no maturity date.Also few preferreds are created equal. Some are the direct obligations of a corporation and are part of the capital structure, just ahead of the common stock. For trust preferreds, the preferreds are the only meaningful stock and the preferreds essentially represent a proportional ownership in an underlying asset such as a set of bonds. Trust preferreds also come in various flavors. Capital trust preferreds have special attributes that make them eligible for special regulatory treatment by their issuers - such as a underlying debt being junior in seniority and the payments being suspend-able for a limited period.And then of course there is tax treatment. The dividends of some preferreds are eligible for a 15% tax rate, but most trust preferreds are basically pass-thru instruments of their underlying bonds, so they are treated as regular (interest) income. Where you buy the preferred can affect whether or not it was a good deal or not.If you'd asked me this question a year or two ago, I'd have had a big list for you to consider and not really thought about the risks that much. There was simply a lot of low-lying fruit out there. Today is different. Most of the deals are gone. Buying a preferred isn't going to get you that much better a yield than buying a bond from the same issuer. Preferreds are more liquid than bonds and can usually be bought in small units, but they also tend to care more risk. So the decision to buy preferreds vs. bonds isn't that clear-cut today.Whenever you buy a preferred, you need to understand it's characteristics. A great place to find that information is a site called http://QuantumOnline.com. Subscribe to the site - it's free. They have a number of lists available. The descriptions also include links to important things like the preferred's original prospectus.Now for some suggestions. For taxable accounts, consider IGK, IDG or BML-Q. For taxable and risk-averse, consider BSC-C or DKT. If you want to avoid financials (hard to do in preferreds), CWZ, XFH or XKN might work, but they're all considered junk and are trust preferreds. However, you're going to have trouble getting a yield above 7% that doesn't incur some significant risk. That's what makes preferreds somewhat unattractive now. There is usually no capital gain potential and yields that won't get you the historic norm for stocks. While it might still be a good idea to diversify into preferreds, it's probably not a market winning strategy today.BTW, I hold most of these and several more. I'm also holding and not buying any more. I'm also considering unloading some if the price is right, so you might be buying from me.Also, most of these issues are thinly traded. Don't use market orders. Decide what's an acceptable price / yield for you and use a limit order.- Joel
Thanks for your insight. DG=Dividend Growth.Current criteria I've written down over the last couple days for pfds:>7% yieldNear parCompany must pay a common dividendPfd must be cumulativeThe reason I have >7% yield is because the current yield on my D-G portfolio is almost 6%. If I'm going to invest in pfd with no growth potential than I would like a higher initial rate.I've heard the limit order advice several times so I'm guessing that will be the way to go. Also seen investors bemoaning the absence of the good-old days pfds back in 2008-09. Guess I'm late to the party.Thanks again.-Ben
Current criteria I've written down over the last couple days for pfds:>7% yieldNear parCompany must pay a common dividendPfd must be cumulativeYou forgot one criteria: Investment grade only.>7% yield is gonna be tough to find.If you are wanting to get good info on preferred stocks, take a look here: http://www.preferredstockinvesting.com/ Spend the $20 to buy his book. It's well worth it. He has tools to help you pick preferreds, but most of them are for subscribers only. I managed to figure out several of his recommendations in the free newsletter (the symbols are blotted out in the free non-subscriber posts), but eventually a couple of us went together and bought a $200 4-member subscription. Even at $100 each, it's worth it, IMHO.Paul's spreadsheet is good, as are Joel's comments. I have both preferreds and "dividend champion" stocks. Problem with a dividend stock is that the price can drop and the dividend is not guaranteed. A dividend stock is a stock that pays a dividend. A preferred stock is essentially a bond that trades like a stock.FWIW, I bought some Dividend Champ stocks late last year. SPH, CINF, GTY, HGIC. All currently are at a capital loss. -7%, -5%, -21%, -16%.
Rayvt,You wrote, A preferred stock is essentially a bond that trades like a stock.This is an over-simplification.Quite a large percentage of the exchange traded preferred stock is essentially a bond that trades like a stock. But you can't just assume that they all are, as a novice with preferred stocks might.All preferred stocks are part of the capital structure of a corporation or a trust. Preferred stock has a senior security interest to common stock, but it's security interest is usually subordinate to any other obligations of the corporate entity - except for items such as other preferred stock issues that are on par. (BTW, this fact can prompt credit rating agencies to lower the credit worthiness of some preferreds compared to that issuer's other outstanding bond issues.)Preferred stock of a trust is often the most senior security. Therefore, it has the most senior interest in the assets of that trust. The common stock is often held by the issuer, but often the issuer receives little or no additional value for holding the common stock of the trust - though this is not always true as some trusts actually pay dividends on their common, even though they are closely held by the issuer. However, should the trust fold or become insolvent, the assets must first go to satisfy the preferred shareholders, which is what is meant by a senior security interest. Usually these assets are a set of bonds and possibly other assets.Preferred stock of a corporation is often subordinate to all types of other debt obligations. Also corporate preferred stock often has no maturity date and the dividend is not a mandatory obligation of the company. However, failure to pay the dividend means they cannot pay dividends on other preferreds with an equal security interest nor on common. Also, most preferred issues have covenants that require the issuer to pay dividends or risk giving significant voting rights to the preferred shareholders ... and risk those shareholders remove the board of directors as a consequence.Finally, there are a number of hybrid preferred securities available. Convertible preferreds in particular are securities that are a combination of debt-like security and stock warrant. With a stock warrant attached, the preferred can trade a lot like the common stock if the warrant is at or above the money. Convertibles come in two flavors - mandatory and on-demand. Mandatory convertibles will convert whenever the necessary conditions are met, while on-demand convertibles are converted at the investor's discretionary. Also some hybrids have interest rate (or other types of) swaps that can make the issue's rate variable (usually tied to some index).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.- Joel
BenSC,You wrote, Pfd must be cumulativeThis is actually a common attribute of trust preferreds and an uncommon attribute of corporate preferreds. With trust preferreds, you're essentially a creditor of the corporation. (Actually the trust is, but the trust has a fiduciary obligation to you.) With corporate preferreds, you're just a stock holder that has agreed to give the company money in the hopes of receiving an (above average) income stream while giving up any aspirations of capital gains. Should things go south, a corporate preferred holder may loose both the income stream and eventually their original investment as creditors will receive preference in a liquidation or reorganization.- Joel
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.
So I ran a screen on Quantum Online just before making the initial post on this thread. Initial criteria:- Min coupon rate = 7%- Preferred Stocks and Trust Preferreds only- All Company Securities- Only US securities- NYSE/AMEX/Nasdaq securities only- Securities with cumulative dividendsThis returned 198 income securities.Me, with the slight touch of OCD that I possess, decided to create my own spreadsheet of these securities. I took the initial results from Quantum and further screened these securities for companies that paid a regular dividend of at least 2% (why 2%? well, had to pick a number and that seems to me to be a decent cushion though I know one cannot count on REITs to pay at a consistent rate). I also stripped out any securities that are called or partially called or have anything "funky" going on with them. This has given me a list of 96 securities to continue refining. My next steps are to input in the current price, S&P rating, M* evaluations, and price variance for the security. I'm not quite halfway through that task. Once I get done with that spreadsheet I'll go from there.-Ben
BenSC,You wrote, Me, with the slight touch of OCD that I possess, decided to create my own spreadsheet of these securities. I took the initial results from Quantum and further screened these securities for companies that paid a regular dividend of at least 2% (why 2%? well, had to pick a number and that seems to me to be a decent cushion though I know one cannot count on REITs to pay at a consistent rate). I also stripped out any securities that are called or partially called or have anything "funky" going on with them. This has given me a list of 96 securities to continue refining. My next steps are to input in the current price, S&P rating, M* evaluations, and price variance for the security. I'm not quite halfway through that task. Once I get done with that spreadsheet I'll go from there.I do something similar. At least I have a list based on a list from year-end. I recommend importing the sheet into GoogleDocs. A GoogleDocs sheet can get live (delayed) quotes for each security.I have my spreadsheet broken down into 2 pages - one with raw QuantumOnline data and another for mining. The Quantum data page has the following columns based on their original reports, plus some search-and-replace massaging:Symbol CUSIP Security Description StockExchange IPO Date Cpn Rate Ann Amt LiqPref Call Price Call Date Matur Date Moodys S&P Rating Date 15% Tax Rate Conv IPO Prospectus Distribution Dates First Dist Month First Dist Day Frequency SuspendedThe mining page has the following:Symbol Security Description Ann Amt Cpn Rate Price LiqPref Yield Post-Tax Yield Matur Date YTM Post-Tax YTM Call Date YTW Post-Tax YTW Moodys S&P 15% Tax Rate Suspended Distribution DatesSome of the items are just lookups from the data table. Others are GoogleFinance() lookups. Others are formula. The post-tax columns are really just estimates based on an assumption of a 25% marginal income tax rate. However, I find the post-tax estimate to be very useful in comparing returns for taxable accounts. The entire thing is just a work-in-progress. I'd like to adjust my Yield, YTM and YTW calculations by the amount of accrued, but unpaid interest - I can know this based on the payment dates and the coupon. I'd also like to create a table of estimated default risks (as a ratio) based on the Moodys & S&P ratings. I could then discount Yield, YTM & YTW based on the estimated default risk so I can attempt to compare all of the fixed yield securities directly.Anyway, thought that might get you thinking about how to analyze the securities available.- Joel
Symbol CUSIP Security Description StockExchange IPO Date Cpn Rate Ann Amt LiqPref Call Price Call Date Matur Date Moodys S&P Rating Date 15% Tax Rate Conv IPO Prospectus Distribution Dates First Dist Month First Dist Day Frequency Suspended
Symbol Security Description Ann Amt Cpn Rate Price LiqPref Yield Post-Tax Yield Matur Date YTM Post-Tax YTM Call Date YTW Post-Tax YTW Moodys S&P 15% Tax Rate Suspended Distribution Dates
I absolutely need to start using google docs. Major shortcoming in the Apple Numbers spreadsheet program is inability to pull a feed from internet (at least not without some programming that is a little above my head). That being said, I have found that inputting data, no matter how time consuming, is a great way to gain an appreciation for how stocks and companies measure up against each other. I will look at adding some of your data points to my spreadsheet. One item I have on my sheet currently is the number of distribution payments the current price is over/under which leads to a question that's been hanging out there in my mind. I understand the (wise) advice to not buy above par (but the advice on buying low and selling hi...that one still escapes me...) However, if I purchase a pfd above par but recoup that overage in distributions, what is the concern? As an example...yesterday, PSA-G was at $25.20 (0.80% above par) with a current yield of 6.94%. That is 0.46 payments above par. If I bought 100 shares at $25.20= $2520 invested. In the first distribution, I would receive $43.75 ($1.75 ann distribution/4*100 shares). If PSA called (@ $25.00/share) that security following the first and only distribution I received, I would lose $0.20/share ($20.00) on the call but will have netted $23.75 by adding back the distribution. To me, the apparent danger is the issue of being called before receiving a distribution. Is there another danger I am not seeing?-Ben
To me, the apparent danger is the issue of being called before receiving a distribution. Is there another danger I am not seeing?No, mainly it's just the built-in capital loss, whereas if you buy below par you have a built-in capital gain. Although the gain/loss is unrealized and may not become realized for quite some time.When looking at the price, you really should factor in any accrued but unpaid dividend. For example, many of mine pay around $0.46 per quarter, so I have to subtract out about $0.13 per month depending on how far it is from the next ex-dividend date.Right now I hold BMR-A, looking to sell it when it gets enough above par. Last price 25.40. Dividend is $0.154/mo and we have one month to go to the ex date. So the 25.40 includes $0.307 of accrued dividend for a "real" price of 25.09. That's a yield of about 7.4%, at a built-in loss of only 9 cents. That's probably a risk worth taking, if you can't find anything better that's still under par.BWDIK? I'm still pretty new at this game.
BenSC,You wrote, One item I have on my sheet currently is the number of distribution payments the current price is over/under which leads to a question that's been hanging out there in my mind. I understand the (wise) advice to not buy above par (but the advice on buying low and selling hi...that one still escapes me...) However, if I purchase a pfd above par but recoup that overage in distributions, what is the concern? As an example...yesterday, PSA-G was at $25.20 (0.80% above par) with a current yield of 6.94%. That is 0.46 payments above par. If I bought 100 shares at $25.20= $2520 invested. In the first distribution, I would receive $43.75 ($1.75 ann distribution/4*100 shares). If PSA called (@ $25.00/share) that security following the first and only distribution I received, I would lose $0.20/share ($20.00) on the call but will have netted $23.75 by adding back the distribution. To me, the apparent danger is the issue of being called before receiving a distribution. Is there another danger I am not seeing?No, I think you're getting it. The problem is known as call risk. (Same problem exists in corporate and muni bonds.)It's fine to buy a preferred that's above par that's non-callable. There you only have the usual risks such as default risk. Callable issues need a little extra caution.For a callable preferred, it's best to calculate Yield-To-Worst (YTW). That tells you how much you stand to gain (or lose) if you buy this issue and it's called at the next (usually first) available date. This number tells you something about the call risk you're assuming.And then there are the issues that are already callable. Those usually have undefined YTW returns because the issue could get redeemed tomorrow. However in some cases it might be worth investing in some of those because: 1) your analysis shows that they are not in a position today to call their debt; and 2) they are not so far above par that you are unlikely to recoup your entire invest by the time they do call this issue.Ironically buying a callable issue from a highly rated company may present the most call risk. That's because highly rated companies are the most likely to exercise their call option. But preferreds can muddy this otherwise clear piece of advice, because the underlying call warrants may not actually be owned by the company that issued the underlying debt. Instead, a 3rd party may own the warrants and they may choose to exercise them in order to profit from an arbitrage opportunity, rather than simply cashing them in to refinance the debt. (Had this happen to me with 2 Ford trust preferreds.)- Joel
I appreciate all the responses. Still researching and definitely intend to add pfds to my portfolio at some point in the near future. Okay, another rookie pfd question...do you reinvest you pfd dividends in the same pfd shares immediately? I'm sure this has a lot to do with one's overall dividend strategy ("DRIP" or accumulate) but with the call issue out there are some additional considerations for pfds.Thanks in advance.Ben
BenSC,You wrote, Okay, another rookie pfd question...do you reinvest you pfd dividends in the same pfd shares immediately? I'm sure this has a lot to do with one's overall dividend strategy ("DRIP" or accumulate) but with the call issue out there are some additional considerations for pfds.I do, but I bought them for their yield - not for the income. On the other hand, my girlfriend bought a bunch of them for the income - she uses to the proceeds to pay her mortgage.I happen to think the ability to reinvest dividends is one of the advantages of exchange-traded preferreds. However, most brokers pick-and-choose what preferreds they will DRiP - it seems to be based on trading volume, but not always - so there are a couple of my preferred holdings that still result in a cash payout.Of course DRiPing in a taxable account can make for some tax and cost accounting headaches especially when it comes time to sell, so hopefully your broker tracks that stuff for you.Whether or not DRIP makes sense for you will depend on your investment strategy.- Joel
I do not automatically reinvest the dividends, but instead accumulate dividends in a money market account and then make the best investment choice at the moment when sufficient funds are accumulated to make another investment (sometimes in more of the same issue, but not always).
As always, thank you for the responses. I spoke with my financial institution of choice and they said in general they will reinvest dividends as that is my current "default" choice for the brokerage account but that there are always special cases with pfds. I think with pfds I would prefer to accumulate and then reinvest but at my current investment level it would take some time to accumulate enough dividend $ for reinvestment. Hopefully that will change in the near future. Thanks again.Ben
It is going on three years since a post has been made to this board. Is there another board that is currently being used to discuss preferred stocks?I purchased a couple of preferreds recently (PSA-R & PSA-W) and sold them almost immediately (at a gain) since I realized that I really didn't fully understand what I had bought.I had purchased them as as part of a rung in my bond ladder but realized that between being callable and also bearing no maturity date that this probably wasn't a good use of preferred even if they do have better dividends than bonds or CDs.Anyway, I'm now interested in exploring preferreds as a means of further diversifying my portfolio.- Craig
Preferred stocks are usually discussed on the Bond and Fixed Income discussion board.http://boards.fool.com/chc-heli-bond-price-31227665.aspxSometimes on the Dividend Growth discussion board.http://boards.fool.com/secured-promissary-note-31228272.aspx...I have done some preferred investing over the years, but recently find them not so attractive. Because of low interest rates, the good ones tend to be priced well above their call price. That means they can be called from you at a loss. The high yield ones tend to be low quality, junk bond rated. Not a good investment in my book.QuantumOnLine is the best source of info. They give details of listed preferreds including their call provisions, current bond rating, and links to the original prospectus (which will contain details of call provisions which can be complex).It has been a while since I looked at the PSA preferred issues, but as I recall each one is tied to a specific Public Storage location or portfolio making them somewhat different from many preferreds.For those who need fixed income these days, dividend paying stocks are probably a better choice. Over the next few years, rising interest rates could make preferred stocks more attractive, but right now one must research carefully to find the good ones.If you have more questions, I can try to get answers for you. Ask away.
Paul (I assume that's your name.)Thanks for the reply. I do follow the Bond and Fixed Income Board occassionally but will have to add the Dividend Growth board to my favorites.One question in regards to your comment ...Over the next few years, rising interest rates could make preferred stocks more attractive ...One of the very reasons that I second guessed and sold my PSA purchases was my belief that interest rates have to rise in the near future (and may rise for a considerable period of time.) I thought that with a significant rise in interest rates, the market value of my preferred holdings would have to go down. And also, that the issuer would be less likely to call any outstanding perferreds as any reissues would have to be offered at a higher interest rate. Therefore I could be stuck holding the perferred (at a decreasingly attractive interest rate as well as a depressed market value) unless I was willing to sell them at a loss.Perhaps you are saying that higher interest rates might make FUTURE purchases of preferred stocks more attractive?Anxious to hear your thoughts ...Craig
Indeed, when interest rates rise, you expect the value of preferred stocks, bonds, and even dividend paying stocks to fall to keep their rates competitive.The usual strategy to minimize that effect is to buy fixed maturity date securities like owning the bonds themselves or something like CDs. As long as you hold to maturity (and the issuer can afford to pay) you expect to collect full face value. Hence, you take no loss due to rising interest rates (unless you are forced to sell prior to maturity).Stocks with a long history of increasing dividends provide some hedge against this in that over time their yield to you may continue to increase.As to preferred stocks, the major problem is that with interest rates at historic lows if you buy now, you may have to wait a very long time for interest rates to return to this level. So yes, that implies you being forced to sell at a loss. Of course, if you bought years ago when rates were higher, you are doing fine to hold them unless they got called.But that is much less of a concern for preferred stocks once interest rates return to more average values. Its the extreme lows that pose the risk.I agree that interest rates are at historic lows and likely to rise from here. If Alan Greenspan were in charge, he would be raising rates slowly to have some ammunition to fight inflation if it arises. Now we have low rates and the feds holding them lower with quantitative easing, ie the feds buying bonds driving up bond prices and keeping interest rates artificially low. So far they have mentioned plans to scale back the buying (and investors have responded just short of jumping out of windows for fear of the implications).In short, I suspect it will be two or three years before interest rates get anywhere close to average numbers. In this situation a half percent rise over the next year would be a lot.Mostly this matters if you need fixed income. Dividends stocks are still the best bet. Personally I'm playing for capital gains with equities these days.
Ref:http://www.preferredstockinvesting.blogspot.com/andhttp://www.cdx3investor.com/Spend 20 bucks and buy the book.If you want to get the requisite data without a lot of work, get a subscription or join a group subscription. You can email me for details if you like.FWIW, the current "bargin table" lists 60 stocks meeting all his criteria except coupon rate, all selling below par, current yields from 5.03% to 6.81%.32 meet all 10 criteria and are still in the non-callable period, yields from 6.12% to 8.22% (some are above par)So, they're out there. Quantumonline is excellent but doesn't narrow down to the selections to the handful that are good investments. I throw 50 bucks to him once a year.
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