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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 35272  
Subject: Re: Preferred Stocks Date: 1/3/2011 7:18 PM
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pauleckler,

You wrote, It is not a particularly good time to buy preferred stocks. Yields are so low on other fixed incomes, that some will want to look at preferred issues. But most are now priced at a premium over their call price. And one suspects that those still discounted are discounted for a reason.

I still think there are some decent buys in preferred stocks - certainly none as compelling as a year ago; but some are still pretty decent.

I happen to have a taxable account that is entirely preferred stock investments. The account consists of 10 issues and as of COB today, the current yield on the account is 7.74%.

A problem associated with preferreds are that they tend to be dominated by financial issuers. The above account currently holds 66.7% in financials by dollar value. 47% of the account is held in Capital Trust Preferreds from bank holding companies.

A result of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 is that most Capital Trust preferreds have become callable - even if they're not yet listed as callable. That's because they all have a provision that allows them to be called as a result of a regulatory event - of which the proposal and passage of the Act were just two. The Act actually creates a series of regulatory events that will occur over the next several years effectively giving the issuers the right to call all of the trust's shares at pretty much any time.

As you all know, the call-ability of a debt tends to put an upper ceiling on its price, which in turn helps the issue retain its yield in a low interest rate environment. Of course the down-side is the risk that the issue will be called and I'll be forced to re-invest at then-current rates. But since I didn't buy any of these issues above par and since there are no issuers of any quality paying anything like 7 or 8% on bonds today, I'm willing to take the risk that I may have my holdings called and I may have to reinvest them at pretty much at any time. In fact, a handful of the preferreds I've held in my TIRA account have been called over the past year - just none of the financial issues as yet.

- Joel
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