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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50  
Subject: Re: Anyone home? Date: 6/11/2011 5:09 PM
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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
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