Do anyone of you Fools invest in preferred stocks?What are the pros and cons?How does one find which companies have issue preferred stock?
Do anyone of you Fools invest in preferred stocks?I do not.What are the pros and cons?A preferred stock is sort of like a cross between a bond and a common stock. So the pros and cons would be somewhere between the two.How does one find which companies have issue preferred stock? There is a preferred stock message board, but, it does not seem to be active. http://boards.fool.com/preferred-stocks-116464.aspxThe might discuss preferred stocks on the Fixed Income message board http://boards.fool.com/bonds-fixed-income-investments-100135... Bob
I looked into preffered stocks once and was completely disgusted. Preffereds used to be relatively simple but have morphed into incredably complex securities. Some are callable, some "mature" and turn into common stock at a pre-determined ratio which may benefit the investor or the company more. You almost need to be an expert to dable in this area. Eventually I purchased PFF a preferred stock etf and let the pro's do the legwork while I collect the dividend. Scott
Do anyone of you Fools invest in preferred stocks?Yes. I have a portfolio of preferred stocks, mostly purchased in late 2009, that pays enough income that it's made my mortgage payment for the last 14 months.What are the pros and cons?Here is a recent article from Morningstar that talks about some of these issues http://news.morningstar.com/articlenet/article.aspx?id=36762...How does one find which companies have issue preferred stock?A good online source that I have found is www.quantumonline.comAJ
See this thread on the Bond and Fixed Income board for several lists of preferred stocks.http://boards.fool.com/preferred-stocks-28999136.aspx?sort=w...Once you have the ticker for the issue (which you can usually get from a ticker lookup search on QuantumOnLine.com), you can find current pricing charts on most services including Yahoo Finance.The most important aspects to watch are 1) call provisions, 2) bond rating, and 3) competitive yield.Most preferreds are callable after a specified date at a specified price. You can find call provisions summarized on QuantumOnLine, or follow the link to the original prospectus for the issue. Some have fairly complex call provisions, but most are callable at $25 or $10. You especially do not want to buy one at a premium over its call price and then have it called out from under you at a loss (sometimes without a single dividend payment). Moreover, call provisions can distort prices payed for a given issue. It is not uncommon to find that the one paying an unusually high yield is callable soon. Or call price holds price below market giving an especially high yield.Bond ratings from AAA down to BBB are usually considered investment grade. Those rated lower are junk bonds. They are higher risk and hence lower rated bonds pay higher yield. So obviously a good buy is one that pays a higher yield than justified by its bond rating. QuantumOnLine is reasonably up to date on bond ratings. But there is a recent scandal about bond rating agencies and mortgage backed securities. They are fairly reliable on preferred stocks, but its a good idea to select issues with publically traded companies. Then you can read the annual report of the company, and read about its common stock to determine if its business prospects are good and especially is it reporting a profit or losses.Yield is straight forward. Get the best yield you can consistent with reasonable risk, and plan to own at least five issues for diversification.When buying preferred stocks, most are thinly traded. It is best to buy them with limit orders. Market orders can distort price curves.A new element is third party trust preferred issues. These are preferred stocks issued by an investment banker backed by a single long bond issued by a client company of the bank. In essence you are buying a bond but at discount broker commissions and with published price history, a rarity with most bonds. These are often listed under the sponsoring bank or their brand name, but you can find them with a ticker lookup search for the company on QuantumOnLine.One of the most recent features appearing in the prospectus of preferred stocks is a provision that allows the issuer to defer payment of interest for sometimes 20 quarters without penalty. I am not aware of any that have suspended payment under this provision, but it does worry some investors. Read the prospectus before you buy to see if this feature is in there.I hope this introduces the topic. Any questions, feel free to ask.
How does one find which companies have issue preferred stock?... www.quantumonline.comAnother ishttp://www.preferredstockinvesting.blogspot.com/He pushes his book pretty heavily, but there is a lot of good info to be gleened. The book is only $18 and IMHO it is worth it....provision that allows the issuer to defer payment of interest for sometimes 20 quarters without penalty. I am not aware of any that have suspended payment under this provisionFord did.I made a nice profit on F-S, buying it at a 43% discount after Jim Cramer mentioned it several times (and after doing my own due diligence). They suspended the dividend on 4/09 and paid all the deferred dividend of $5.08 on 7/10. (That was a spec, though. In my preferred stock portfolio I *never* buy one that has ever suspended dividends.)
Yes, I've held mostly REIT preferreds for the past 12 years. Like bonds, income is the principal benefit of preferreds, but this comes with multiple risks, to include illliquidity, w-i-d-e bid-ask spreads, inflation, interest rate, redemption (at the worst time), perpetuity, dividend suspension, default, and getting-orphaned-and-ignored risks. This all means that if you're considering these unique securities, you need to do your homework, be sure you understand all risks and perhaps most importantly, NEVER, NEVER buy for the yield alone.BruceM
And be sure to research whether or not the dividends are qualified under IRS rules for the no or low income tax rates on qualified dividends.Most preferred stock payments are not qualified. They are like interest, fully taxed at ordinary income tax rates.
The usual requirement is that if a company suspends dividends on the preferred, it cannot pay any dividends on the common until it brings the dividends on the preferred up to date. However, preferreds come "cumulative" and "non-cumulative". In a cumulative preferred, if they miss a dividend they are under obligation to catch up before paying any dividends on the preferred. It is my observation, although perhaps not a requirement, that cumulative preferreds have a final maturity date, which may be far in the future (2050?) and the dividends are not qualified for tax purposes. The non-cumulative preferreds I've seen do not have a final maturity date and the dividends are qualified for tax purposes. I am not certain whether the company is obligated to catch up any missed dividends on the preferred before paying any dividends on the common, and I do not have an example where this happened. Best wishes, Chris
Chris, I incorporated your comments into the Preferred Stocks article on Investing Wiki.http://wiki.fool.com/Preferred_stockI hope you don't mind.Paul
RayVt, I incorporated your comments into the Preferred Stocks article on Investing Wiki.http://wiki.fool.com/Preferred_stockI hope you don't mind.Paul
Fine, but please amend it if someone comes up with more authoritative comments. Best wishes, Chris
Thank you Chris. I'll do that. But feel free to edit the Preferred Stocks article in Investing Wiki yourself if you like.
ChrisToday, most financial preferreds (REITs, banks and retail brokerages), issue their preferreds as 'Trust Preferreds' or 'REIT Trust Preferreds' (a variant on trust preferreds), whereby the financial company issues bonds to a trust, who then cuts itself up into $25 pieces and is sold, usually through retail cahnnels, to investors. The company pays the trust each quarter the bond interest, which then pays the preferred shareholders. This allows the financial entity to pay the preferred dividends with pretax dollars. But the Federal Reserve has some requirements of these preferreds to qualify as Tier I capital, some of which are the preferred stock must guarantee (i.e. not redeem the preferred shares) for not less than 20 quarters from issue (5 years), the shares must be cummulative and if dividends are suspended for a certain number of quarters (I believe its greater than 10 quarters...but not sure on this), then the preferred shareholders must be given certain voting rights (MPG-PA just went through this with their suspended dividend)....and so forth. But a couple of trade-offs to investors is that these preferred dividends are not available for favorable tax treatment, and, the real kicker, suspended dividends must be treated as OID interest income by the shareholder, even though the dividends are suspended. However, this does not seem to be the case with REIT preferreds.Preferred stock, whether regular or trust preferreds, almost never have a maturity date, and are at risk of being perpetual if the company never redeems them. A sort-of preferred stock maturity date exists with most trust preferreds, as the bonds issued to fund the preferred trust do have a maturity date....usually 30 to 40 years out, and most of the prospectii I've read say that these bonds and the preferred stock they fund, will be redeemed at the bond's maturity date, although others say that the board of directors reserves the right to reissue the bonds at market rates when the original bonds mature.And I've never seen or heard of a situation where a suspended preferred stock MUST be paid other than before a common dividend is paid, cummulative or not. This explains why MPG-PA, which has been suspended since 2008, is currently priced at about $19/share. The analysis I've seen seems to think that MPG, in accordance with the REIT rules, will soon have REIT taxable income, which means the REIT must pay this out as a dividend to maintain their REIT status, and that, it would appear, the preferred-A shares will get paid first.BruceM
pauleckler,You wrote, RayVt, I incorporated your comments into the Preferred Stocks article on Investing Wiki.http://wiki.fool.com/Preferred_stockI thought I would add a few things regarding the FAQ:Convertable Preferreds:Some convertable preferreds are manditory convertable preferreds. Manditory means that the preferred will convert to common shares given a set of pre-defined conditions. The conditions and terms of the conversion are set forth in the prospectus and are not under the investor's control.Bond Ratings:Sometimes a preferred's yield may be higher (or lower) than the bond rating would warrant because the market is anticipating or incorporating bad (or good) news or speculation. Rating agencies tend to be the last to adjust to news. However, the market isn't always right either, so do your own analysis.Trust Preferreds:Trust preferreds have been available for at least 15-20 years. How is this new? They are a consequence of the IRS rulings about Pass-through Investment Trusts such as REITs. Trust Preferreds likely began with REIT issues and expanded to other investment structures. Several of my own holdings were issued in the 1990's.Third Party Trust assets can be more complex than just holding a bond series - those are the simplest structures. For instance, synthetic CDOs are a type of third party trust as well. The underlying assets are a set of Treasury bonds and a set of credit default swaps issued by the Trust. This structure allows the synthetic CDO to simulate the gains and losses incurred by the insured bond holders without actually holding the original bonds. Variable rate preferreds are often constructed in a similar fashion - by buying a fixed-rate bond from some issuer and then selling an interest rate swap contract. This lets the trust tie the dividend to changes in a benchmark interest rate.Suspension of Dividends:Quantum Online currently lists 133 suspended issues - both cummulative and non-cummulative. AFAIK, a unpaid dividends do not need to be paid for payments to a non-cumulative preferreds to resume. However, preferreds have a seniority interest superior to common stock, so generally the issuer may not pay a dividend to common - or any other equally ranked security - while dividends to that issue are suspended.I've had an issue (OSBCP) suspended on me. The issue remains suspended. Unlike OSBCP, some of the suspended issues listed by Quantum Online are in bankrtupcy.Qualified Dividends:Generally, the tax treatment of dividends depend on whether or not the issuer paid corporate income taxes on the funds used to pay the dividends. Dividends paid from after-tax income are by definition qualified dividends. This is actually a separate issue from suspension of dividends; however, they are related because an investment trust will loose its tax status if it fails to distribute at least 90% of net proceeds from investment activities. This means that for a trust to suspend payments to preferred shareholders, the trust's investments must also be suspend-able.Capital Trust Preferred:You should probably add a section for this type of security.- Joel
Thank you for your comments, Joel (and Bruce too).Investing wiki in Fooldom is open to all of us. Anyone with a username in Fooldom is free to edit add to or revise any entry or to create and add new ones as they see fit.The advantage is that unlike FAQs, they are living documents which can be revised as new information becomes available or people with additional knowledge decide to contribute it.The one problem is that entries are subject to mischief. People do monitor new edits (Recent Edits) in the left sidebar menu of all articles and the history entry (History under View in the left sidebar) for each article.Every wiki relies on the user community to keep it accurate, up to date, and complete. All entries are subject to editing by others.If you would like to make additions or corrections to the Preferred Stock entry (or any other entry), feel free.(I will hold off on entering the additional information to give you the chance to make your own additions. But will add in parts of it if you decide not to put it in there.)