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Author: ww4321 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 922  
Subject: opinions on preferred stocks for income? Date: 12/22/2011 12:20 PM
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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: 915 of 922
Subject: Re: opinions on preferred stocks for income? Date: 12/22/2011 3:21 PM
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ww4321,

I hold a number of preferred stocks. They come in a lot of varieties. In general preferreds are somewhere between bonds and stocks in terms of risk. Some are more like regular bonds; some more like stock. When you buy, you need to ensure you are likely to get paid for the risk you are taking.

If you want details on individual preferred stocks, give QuantumOnline.com a try. It's free and provides a lot of details about individual securities. Screening for the "best" preferreds can be a problem though. There aren't many tools to do that in part because the terms for a lot of preferreds are non-standard.

Alternately consider adding a preferred ETF like PFF to your holdings. Or you could use a closed end fund like Nuveen's JPS. Be careful of closed end funds though - they tend to be leveraged, which usually works in your favor but not always.

One more thing: Preferreds tend to be long-dated and are usually of fairly low credit quality. So you have to take some risks buying into these. However, preferreds tend to be more liquid than bonds, so you tend to take less of a hit on spreads if you feel you need to get out.

If you have specific questions about preferreds, ask away.

- Joel

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 916 of 922
Subject: Re: opinions on preferred stocks for income? Date: 12/22/2011 3:51 PM
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QuanumOnLine lists many trust preferred issues. But be very careful about call provisions. With interest rates so low, most issues are priced well above their call price. Hence, you can take quite a loss if the issue is called. Low interest rates make it easy for issuers to refinance at lower cost and call the issue.

As for closed end funds, I like NQS and BLE (tickers). Both are leveraged but have done well in spite of dire predictions when the yield curve flattens out. They increase their yield by borrowing at short term rates (currently very low rates) and investing at longer term rates. Hence, extra yield comes from the slope of the yield curve. A flat yield curve means reduced income but it does not mean the fund fails; it merely means a few pennies shaved off of income.

BLE is paying 6.8% fed tax free (mostly, yield from borrowing is now taxable apparently). NQS pays 6.8% mostly fed tax free. Both are near their all time highs.

Utility stocks make a reasonable choice these days. Ameren (AEE) is paying 5%. Cigarette stocks have nice yields. These have potential to increase their dividends over time, and may help keep up with inflation.

All of these have their risks. Don't forget to diversify. Don't over do any one holding.

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Author: ww4321 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 917 of 922
Subject: Re: opinions on preferred stocks for income? Date: 12/23/2011 11:03 AM
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thanks---what are some other good preferred stocks?

does the price of the preferred vary with the price of the common?

any other somewhat safe income investments for someone retired?

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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: 918 of 922
Subject: Re: opinions on preferred stocks for income? Date: 12/23/2011 4:39 PM
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www4321,

You wrote, thanks---what are some other good preferred stocks?

There are tons. Look them up on QuantumOnline.com.

I hold a dozen or more issues. My favorites for a taxable account is BML-Q (Merrill / Bank of America) and IGK (ING, NV). These both have no maturity date, are not callable until 2013, are currently under par and are currently yielding about 9.75% pre-tax. Both also pay a qualified dividend so assuming a 15% tax rate for qualified dividends, the effective after-tax yield is a whopping 8.28%.

However these are both bank issues, are both suspend-able and are both rated as sub-prime investments so be very careful. Actually IGK is issued by the Netherlands ING parent, which is primarily an international insurance firm; but it also has banking operations around the world and is currently being backed / subsidized by the Netherland government while it works to de-leverage and divest itself of non-core operations.

Also, does the price of the preferred vary with the price of the common?

It can. It depends on the way it is structured. Convertable preferreds can be converted to common shares under certain conditions, this causes them to trade a lot like common shares. Terms of the preferred can often put a kind of cap or floor on the preferred's share price depending on how the preferred is structured.

Also, the price of a preferred can fall with a company's share price just because the debt appears to be more risky too because of the odds of default have increased. But this is true of most debt issued by the corporation. How far or fast you might expect it to fall depends on the seniority of the security interest backing the preferred and what kind of assets might be available should the company actually get liquidated.

Finally, any other somewhat safe income investments for someone retired?

If you're retired and need to keep most of your assets safe, you should be careful about buying too many preferred stocks for your portfolio. Sometimes they carry no more risk than a company's senior bond issues; but usually that's not true. So if you buy individual issues, you have to be picky and careful if you can't afford the loss of your investment. In those cases you should stick to small purchases, spread it out thinly and/or buy an ETF that does it for you.

Alternately I suppose you could concentrate on only a few A-rated issues. That might still give you a decent yield; but it probably won't out-perform a junk bond ETF like JNK or HYG which at least theoretically achieves some measure of safety through diversification.

So you want somewhat safe? There aren't many preferreds that meet that criteria. If you want safe, you probably ought to buy a basket of CEFs, ETFs (or mutual funds) and leave it at that...

Oh, that does remind me of one thing. Have you considered muni funds? Or buying individual munis? Those are often a bit safer than buying preferreds. The problem with munis is liquidity. Most munis are traded in large blocks [5-10 (and sometimes 100) $1,000 bonds minimum]. That makes it hard to diversify. But munis are often tax-free, which can really make up for their low yields if you have enough other taxable income. If your marginal tax bracket is low, then investigating them is probably a waste of time.

- Joel

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 919 of 922
Subject: Re: opinions on preferred stocks for income? Date: 12/23/2011 11:10 PM
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Here is my list of yield stocks.

https://docs.google.com/spreadsheet/ccc?key=0ArC7PlrDoTbpdFF...

This a Google spreadsheet. Prices and yields automatically update. But bond ratings and stock dividends may be out of date. Caution. I include a few dividend paying stocks for comparison.

I have not invested in any of these recently in that most are priced over the call price and when not are often of low quality. I think closed end funds and utility stocks I mentioned before are a better choice at this time.

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