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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 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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