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Author: 110intheshade Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76082  
Subject: Getting out of MM Date: 1/12/2010 1:54 PM
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Hello Experts..

My wife, scared to death of the last couple of years, has almost 300K sitting in a Money Market account. She wants to hang up the work life but realizes interest on the MM isn't going to generste any real living expenses. We've talked about laddering CDs and don't know enough about bond funds to make any real decisions. I really want to get her out, or at least half out, of the MM to start some income for her retirement. Any avenues or thought on this would be welcome. We're twice bitten w/"Financial advisors" so we've taken to Vanguard for our porfolios.

Thx!
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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66638 of 76082
Subject: Re: Getting out of MM Date: 1/12/2010 6:21 PM
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Actually, no realistic earnings on $300k is going to generste any real living expenses. It's just not enough money. The maximum safe withdrawal rate of 4% will allow you to take out only $12,000/yr.


CD's don't pay diddly-squat right now. To me, they aren't really worth bothering with.

What you might want to do is investigate preferred stocks. These are essentially bonds that trade like stocks. http://www.preferredstockinvesting.com has some good articles, and his book is only $20. (I haven't yet bought it, nor subscribed to his notification service.)

http://quantumonline.com is free and a wealth of information.

I currently own 15 investment-grade preferred stocks, bought at an average discount of 25%, and yielding (at purchase) about 9%. Not FDIC guaranteed, but FDIC guaranteed 3 year CDs are only paying 2.5%. So buy investment grade and diversify.

My best one right now is Ford Preferred S (symbol F-PS on yahoo). This is definetely speculative, not investment grade!! It's a cumulative preferred, on which Ford suspended dividends last April. The coupon is 6.5%, par price is $50.00. I got it at a 40% discount for a yield of 11%. Um, once they resume the dividends, that is. The price has gone up and now the discount has narrowed to 10%. So I also have a capital gain of 60%.

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Author: BruceCM Big red star, 1000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66639 of 76082
Subject: Re: Getting out of MM Date: 1/12/2010 6:22 PM
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We are in a similar situation...and the $10 in monthly interest we're getting on a cash holding of $450,000 just doesn't seem right...

...but I've kept out of the bond fund market, as a sharp drop in unemployment numbers, I fear, would spook the market interest rates something horrible in anticipation of the Fed revving up short term rates. This would send bond prices...at least the investment grades...quickly south, quickly dwarfing any interest paid on the fund.

But as a retiree in need of income, rather than spreading my cash around various bond funds, I bought into several preferred stock and exchange traded bonds earlier in the year. No doubt these values will get driven down somewhat in a rising interest rate environment, but I'm planning on holding onto these for a very long time, so price fluctuation here matters less to me...only the reliability of the dividends.

There are still some pretty strong REIT and utility preferreds trading below par ($25 for most) if you need the income.

You could look into some of the short duration bond funds and ETFs

Other options might include 5 year maturity bond ladders.

Another might be some long-term reliable dividend payers, such as utilities like ED, AGL or SO...but even these have been priced up so that yields are now down to the low 5% range or so.

Otherwise, there just aren't very many highly secure income sources out there right now that won't be sensitive to even small hikes in interest rates.

BruceM

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66640 of 76082
Subject: Re: Getting out of MM Date: 1/12/2010 7:56 PM
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Another might be some long-term reliable dividend payers, such as utilities like ED, AGL or SO...but even these have been priced up so that yields are now down to the low 5% range or so.

You didn't say what your time frame is, but here is a take on the above.

Say you won't need this money (or the dividends) for 5 years. You could buy some stocks: say SO, ED, JNJ, or PG. Automatically reinvest the dividends (Vanguard and some other brokerages do it without charge). After 5 years you have more stock just from the initial investment, plus these companies have a history of increase their dividend rates every year. So that paltry 4-5% return right now could, on an initial cost basis , be yielding 7-8% when you need the money.

FWIW, I hope to either be retiring or near retiring in 5 years. I've started doing the above with 8 stocks. Hoping it will be a steady and slowly growing income stream when the time comes.

JLC

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Author: CheersSRX One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66641 of 76082
Subject: Re: Getting out of MM Date: 1/12/2010 8:28 PM
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Take a look at PPNs -- Principal Protected Notes.
These typically run 2-5 years.
You are guaranteed back your original investment, and will participate in most to all of the upside in the market, depending on the exact note.

Cheers!

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66642 of 76082
Subject: Re: Getting out of MM Date: 1/12/2010 10:57 PM
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...and don't know enough about bond funds....

It is very important to realize that that bond funds behave very differently than individual bonds(or CD's) when interest rates change. They are so different that shouldn't really be considered to be the same type of asset.

For example if you own a five year bond at 4% and interest rates go up to 5% then your situation will not be changed if you hold the bond until it matures. In contrast if you own a bond mutual fund that has an average maturity of five years, then each night the mutual fund company adds up the total value of all the funds bonds and determines the total "net asset value" so the value of your account will go up or down each night and you can loose money if interest rates rise. The good news is that the money in the mutual fund will then be earning a higher interest rate which will help offset the decrease in value.

The last twenty years or so have been a very good time to own bonds and bond mutual funds as interest rates dropped from double digits to the current low rates. If inflation gets started again and interest rated increase, the near future could be a very bad time to own bonds. This isn't to say that bonds and bond mutual funds are bad, it is just you have to understand the way they work and consider only buying individual shorter term bonds since they will be hurt less by increasing rates and will be reinvested at higher rates as they mature.

Just to put something up for consideration. In many areas of the country you can buy investment property like a house or duplex that can provide good income. There is of course a risk that the property might decline in value some more, but if you are going to own it for twenty years or more than as long as the income continues then that is more important than the current value of the property.

I can understand trying to avoid risk, but by having so much in one asset class then you may be actually taking more risk than having a bit of money in lot of different asset classes.

Greg

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Author: PKnudsen Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66643 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 12:07 AM
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We're twice bitten w/"Financial advisors" so we've taken to Vanguard for our porfolios.

Well, VG is a good firm, but consider these:

Citigroup Cap Xx (NYSE:CPRG) Yield: 8.63%. I believe this is the same issue that Citi sold to the government.

SPDR Barclays Capital TIPS ETF (NYSE ARCA:IPE) yield is only 2.54% but pays dividends monthly, not quarterly. The TIPS feature means dividends increase with inflation. (By the same token, they halted last year when there was no inflation.)

Kinder Morgan Energy Partners LP (NYSE:KMP) Yield: 6.59%

BP Prudhoe Bay Royalty Trust (NYSE:BPT) Yield: 16.32% (Might be a tad risky, but we're going to need oil no matter what, right?)


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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66644 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 9:22 AM
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Hello Experts..

My wife, scared to death of the last couple of years, has almost 300K sitting in a Money Market account. She wants to hang up the work life but realizes interest on the MM isn't going to generste any real living expenses. We've talked about laddering CDs and don't know enough about bond funds to make any real decisions. I really want to get her out, or at least half out, of the MM to start some income for her retirement. Any avenues or thought on this would be welcome. We're twice bitten w/"Financial advisors" so we've taken to Vanguard for our porfolios.

Thx!


All good advice. Let me take a different tact.

1. What did the "financial advisors" tell you and how where you bitten? There are indeed some very incompetent folks out there, BUT some failure during the last year may have been inevitable depending on what you wanted and what they advised.

2. Did they help you with some advise about your expense needs in retirement and how much of that needed to come from investments? What is your need? Do you need to earn $300, $3,000 or $30,000 off that $300k to meet your needs.

3. Is the $300k the ONLY funds you have to meet that need? Will this $300k pay for the first dollar of your retirement (be the primary funds) or the last dollar (will it be the discretionary difference between eating at a white table cloth restaurant or McDonalds).

4. Much of the above should give some indication of your risk tolerance both before the crash and now.

5. Vanguard can provide you with some fairly simple retirement planning for a fairly low cost.

Sounds to me like you need some additional retirement planning, but then you may already know.

Hockeypop

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66645 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 10:22 AM
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This is important.

...has almost 300K sitting in a Money Market account..

I relized that the $300K is over the FDIC insurance limits and if your bank goes under like so many have it is possibole to loose money.

These limits keep changing so you need to look into the details of these and make sure that you are under the limits buy moving money to multiple companies or having multiple accounts that will give you higher protection.

Greg

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Author: 110intheshade Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66646 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 2:19 PM
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Thanks for all the thoughtful replies to our situation. I had never really considered high Div paying stocks (ie JNJ PG etc as mentioned.
I wonder about a Div ETF such as DVY?
Our first outing with Financial advisors ended up with being sold a VUL.
That was before I was a fool of course and when we could get out at a not too painful point we did. Another FA outing it was buy "MY" stuff...its the best" (loads ets) I realize there are Fee only advisors but we're just a little soured on the whole experience. Thanks for the tip on Vanguard's service -something to look into.
The preferred stock is something new to me...I'll need to explore it.
The 300k is in Vanguard so I'm assuminmg it would be one of last to go belly up!!
Any more thoughts all aleways welcome...This board is wonderful----THANKS!

110

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Author: BruceCM Big red star, 1000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66649 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 4:54 PM
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I wonder about a Div ETF such as DVY?

I would be cautious with such MFs or ETFs, as these tend to be 'strategy' funds rather than indexes. DVY was juicing its dividends with realized capital gains...which is great when prices are rising...but the dividend took a pretty hefty hit when stocks were not appreciating...not to mention fund expenses, which at 40 bp is a bit high for an ETF. If you're going to go to an income stock ETF, I think I'd stick with the true indexes, like VYM or LQD as a bond index.


Our first outing with Financial advisors ended up with being sold a VUL

Now, I don't know all of your relevant facts, but this sounds very much like a sales rep...not an 'advisor', even though all sales reps like to refer to themselves as 'advisors'....kinda like your local new car sales rep referring to themselves as your 'transportation consultant'.

The preferred stock is something new to me...I'll need to explore it.
All who are potentially interested in or decide to invest in preferred stock need to bookmark www.quantumonline.com. This is a private, non-commercial web site with a full listing of preferred stocks and other income-style stocks, and a summary of each. About the only place you can find such information in one place. You have to register, but there is no cost to register. The guy who runs it operates on voluntary individual donations...kinda like Craigslist....he does it primarily as a public service. And please, please....if you use it, contribute to it. Its an incredible resource.

I've held many preferred stock over the years and hold many today. But make sure you understand how they work. There are some unique drawbacks to preferreds, which are the risks you take for such an attractive yield. As always, in the marketplace, there is no free lunch.

BruceM

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Author: PKnudsen Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66650 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 4:56 PM
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I wonder about a Div ETF such as DVY?

DVY yields 3.85%. It has gained in price as well. Not too bad.
The 300k is in Vanguard so I'm assuminmg it would be one of last to go belly up!!

A fine company, and anyway, to my recollection, during the crisis just one money market fund "missed the buck" and the industry bailed it out.

I don't recall if you gave ages. Will not you & wife get Social Security?

If I calculated it right, 3% of $300,000 is $9000/year. I assume you'll need more than that. Unfortunately that means taking on more risk.


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Author: 110intheshade Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66651 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 5:16 PM
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Thanks again for the thoughtful answers.

Bruce thx for the Quantum link..I will do some investigating. Also the heads up on DVY vs the others...

PKnudson...my original thoughts were to get her out of the MM (where the 300 is..) Total portfolio is about 750K taking into account some stock funds and IRAs. She is 61 and will be getting SS.
I, on the other hand, am a few years younger, and you never know...

I guess by default I am using her case as a guinea pig to figure out my own stratagy in a few years time, Both our Ports are amazingly close,(separate at this point because we've only been married less than 10 years)... so I think I can learn from what we do with her and apply it to me in a few more years

110

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66652 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 5:42 PM
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I relized that the $300K is over the FDIC insurance limits and if your bank goes under like so many have it is possibole to loose money.

If this is in a brokerage account, they are insured by SPIC (more or less like FDIC) up to $250k, IIRC. Then brokerage companies buy insurance on top of that. Its important to ask your brokerage account its limits, if any.

DW and I have accounts at Fidelity and Vanguard and they carry above the SPIC amount to protect our account totals.

JLC

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Author: PKnudsen Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66653 of 76082
Subject: Re: Getting out of MM Date: 1/13/2010 11:55 PM
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PKnudson...my original thoughts were to get her out of the MM (where the 300 is..) Total portfolio is about 750K taking into account some stock funds and IRAs. She is 61 and will be getting SS.


Woot! Well then, make sure you don't pizz her off!

I guess by default I am using her case as a guinea pig to figure out my own stratagy in a few years time, Both our Ports are amazingly close,(separate at this point because we've only been married less than 10 years)... so I think I can learn from what we do with her and apply it to me in a few more years

Makes sense. You'll be fine I am sure.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66655 of 76082
Subject: Re: Getting out of MM Date: 1/14/2010 9:58 AM
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Citigroup Cap Xx (NYSE:CPRG) Yield: 8.63%.

Or C-P, C-I, or C-M. Not quite as good since these are non-cumulative, but they're currently yielding 11.6%. Anything like this should only be a small part of a portfolio.
But 11%!!! Yum.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66656 of 76082
Subject: Re: Getting out of MM Date: 1/14/2010 10:26 AM
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...cont...
The call dates are 2018, 2015, and 2013, and the coupons are 8.125%, 6.5% and 8.5%.
SO it is quite likely that Citi will call P & M when they hit the call date, so you'd possibly have a 30% capgain after a few years of collecting 11.6% dividends.

I find it interesting that the cums are 8.5% and the non-cums are 11.5%. That's a full 300 basis-points higher, which is a 35% higher dividend. Dunno if it's worth the additional risk or not. I own a little bit of both. FWIW, when I bought them, the yields were 8.6% and 15.3%.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66657 of 76082
Subject: Re: Getting out of MM Date: 1/14/2010 11:00 AM
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I find it interesting that the cums are 8.5% and the non-cums are 11.5%. That's a full 300 basis-points higher, which is a 35% higher dividend. Dunno if it's worth the additional risk or not. I own a little bit of both. FWIW, when I bought them, the yields were 8.6% and 15.3%.

Have you actually collected any recent dividends on the non-cumulative preferreds? Last I heard, all the non-cumulative preferred stock dividends had been suspended as part of the TARP deal where the government traded in their preferred stock for Citi shares. Even though Citi paid back $20B in TARP money, the government still holds those shares.

I haven't seen any announcement that the preferred stock dividends have been reinstated. I doubt they will be until the government actually has sold their Citi shares. My understanding is that might take 18 - 24 months.

AJ

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Author: BruceCM Big red star, 1000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66658 of 76082
Subject: Re: Getting out of MM Date: 1/14/2010 1:50 PM
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The Citi preferreds are examples of high yield and very high risk. Citi's highly profitable business model has been based on growing revenue collected from their credit card holders and the fees/charges they've been able to levy...and high risk debt instruments. Both are either gone or are declining due largely to increased regulation. In short, to survive, I think Citi is going to have to change its business model back towards core banking functions...the consumer portion of which is dominated by local banks. I just don't see where Citi will be able to regain its former profitability any time soon...and the depressed and flat stock price seems to reflect this.

This puts the preferred shareholders in precarious position. Cummulative or no, preferred dividends can be suspended at the discretion of the board of directors...within the limits, if any, prescribed by the prospecus of a particular preferred issue. And with the common dividend cut to zero, I would be a very nervous preferred shareholder.

BruceM

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66659 of 76082
Subject: Re: Getting out of MM Date: 1/14/2010 2:27 PM
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Cummulative or no, preferred dividends can be suspended at the discretion of the board of directors...within the limits, if any, prescribed by the prospecus of a particular preferred issue. And with the common dividend cut to zero, I would be a very nervous preferred shareholder.

The common stock dividends were suspended because the non-cumulative preferred stock dividends were suspended. From this 2/27/09 press release http://www.sec.gov/Archives/edgar/data/831001/00009501030900...

In connection with the transactions, Citi will suspend dividends on its preferred shares. As a result, the common stock dividend also will be suspended. The company will continue to pay the distribution on its Trust Preferred Securities and Enhanced Trust Preferred Securities at the current rates.

Note: The "Trust Preferred" and "Enhanced Trust Preferred" are preferreds with cumulative dividends.

I haven't seen any releases saying that the preferred share dividends have been reinstated.

AJ

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66660 of 76082
Subject: Re: Getting out of MM Date: 1/15/2010 12:09 AM
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All to true. My purchase of the C non-cum was pure speculation. When they resume the dividends the 15% will be great. Meanwhile, I currently have an unrealized capital gain of 30+%. The market is saying that they expect Citi to recover.

If Citi plans to stay in business, it will eventually have to resume dividends. When they do, I'll be earning 15% -- minus the period where I got nothing.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66661 of 76082
Subject: Re: Getting out of MM Date: 1/15/2010 12:18 AM
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All to true. My purchase of the C non-cum was pure speculation. When they resume the dividends the 15% will be great. Meanwhile, I currently have an unrealized capital gain of 30+%. The market is saying that they expect Citi to recover.

If Citi plans to stay in business, it will eventually have to resume dividends. When they do, I'll be earning 15% -- minus the period where I got nothing.


But, in a thread where the OP says I really want to get her out, or at least half out, of the MM to start some income, posting a suggestion to buy Citi non-cumulative preferred shares that have stopped paying dividends seems a bit off the mark - especially when you don't mention that the dividends have been suspended.

AJ

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66662 of 76082
Subject: Re: Getting out of MM Date: 1/15/2010 1:37 AM
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Yes, topic drift. The bane of internet message boards.

Although I can squint hard and say that it just gives the OP additional data to consider. So, yup----when you look at preferred issues you need to verify things like "has it been suspended". And in the case of C non-cums, it has, even though quantumonline doesn't say that it has.

Oh, and it's also a great example of why you *must* diversify.

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