No. of Recommendations: 5

You wrote, How do you evaluate Preferred Stocks?

You read the preferred stock prospectus, analyze them for yield, any capital appreciation potential and adjust your assessment for factors like default risk, call risk, maturity date and tax treatment that can reduce the effective YTM. You then compare them to alternative investments such as stock and/or bonds individually for that security or sector or as an investment group as a whole and decide if their potential return and/or the attributes of a preferred security such as the income stream would be desirable in your portfolio.

One of the risk factors most newbies probably don't appreciate is that a lot of preferred stock tend to be junior obligations. That is if the company were to go bankrupt, the odds of you getting paid is low. However in some cases such as bank issues, the senior debt isn't much better.

Also you need to learn the difference between the various types of preferreds. Not all preferreds are recreate equal.

1. Corporate preferreds are the direct obligation of an operating company.
2. Trust preferreds are issued by trust entities and the trust exists solely to distribute payments from some underlying asset(s) to the shareholders.
3. Capital preferreds are used by regulated industries (mainly banks) to raise regulatory capital and their use and terms are constrained by their regulatory bodies.
4. Capital trust preferreds are Trust-issued preferreds that contain regulatory capital bonds and their restrictions tend to match the underlying bonds.
5. Finally there are convertible preferreds of which there are two kinds - optional and mandatory. Optional convertible preferreds convert to a common stock at a ratio stated in the prospectus at your option; mandatory convertible preferreds convert when certain conditions have been met.

Also, I am fine with making ~7%. So I was thinking Preferred Stocks.
I have been looking through:

I have pulled a few out. Wondering how people would evaluate them.

Southwest Bancorp Inc. Southwest Capital Trust II- Trust Pfd Sec OKSBP
It has paid its last 8 dividends
In 2008 it was $26. And now it is $26.70. Stable price.

ING Groep 8.50% ING Perp. Hybrid Capital Secs. IGK
It has paid its last 8 dividends
In 2008 it was $24.50. And now it is $25.54. Stable price.

AMR 7.875% PINES 2039 AAR
It has paid its last 8 dividends
In 2001 it was $25.00. And now it is $23.52. Stable price.

Deutsche Bank Contingent Capital Trust V 8.05% TruPS DKT
It has paid its last 8 dividends
In 2008 it was $25.20. And now it is $25.70. Stable price.

I've investigated the last 3 preferreds in the past. I hold shares of IGK, as well as IDG and INZ - all are ING perpetual capital preferreds. I consider ING's securities to be a reasonable risk, but I'd only consider buying in the dips today.

OKSBP is a small Capital Trust preferred issue ($30M) from a small bank holding company. The issue is unrated. I've been burned (well, slightly singed) by an issue like this and won't go there again. The problems with small issues is the lack of information and the lack of liquidity. This issue's yield might look attractive now, but if the issue gets suspended, you'll be wishing you'd made another choice.

AAR I've avoided as too risky. AMR has been through bankruptcy in the recent past and could easily head there again. The company is capital intensive, but it owns almost no assets. All of it's planes are leased and likely bond holders are likely to get stuck holding a mostly empty bag if the company ever goes under completely. The only upside to AAR is that the issue is actually senior debt, so the default scenario may not be quite as bad as I make it sound. But in any case, I think AAR clearly deserves it's junk bond status.

I like DKT. It offers a good yield from a respectable bank with a 15% tax treatment, making it a good candidate for a taxable account. The problem with Deutsche Bank is that it has a fair amount of exposure to Greek debt. I don't think Deutsche Bank will go down, but it's likely that it's going to struggle a lot if Greece goes bankrupt. If that happens, DKT might be downgraded and you might be able to buy it even cheaper when that happens.

I don't own any DKT today; but of the four you suggested, this is the one I'd probably buy today if I were in the market in a taxable account.

- Joel
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