I am interested in opinions on the pros and cons of using preferred stocks for a part of a fixed income portfolio. ALso, if anyone knows of a good source for information on preferreds currently being offered.
My most recent list of preferred stocks is posted here--http://boards.fool.com/Message.asp?mid=25153673&sort=usernameAs for sources of information, the best is probably Quantumonline.comhttp://www.quantumonline.com/Type in any ticker symbol for a brief summary or follow the links to the original prospectus for the issue. Bond ratings for the issue are reasonably current. Call information is readily available.Preferred issues can work quite well. The main concern is that they are often callable at $25 or $10. When interest rates are low often shares are priced at a premium to call. That means the issue can be called out from under you at a loss. So make sure you understand the call provisions before you buy.These days many preferred issues are Asset Backed Securities. They are in reality long bonds that are listed as trust preferred issues offered by investment bankers like Lehman or Merrill Lynch. That lets you buy and sell bonds at discount broker commissions.The Wall Street Journal used to have a daily listing of preferred stocks including many trust preferred issues. Those listings now have been discontinued. That makes it more difficult to find preferred issues. Hence, my list of them.Good luck.
Paul,I think there's a preformat tag you can use to keep the alignment.Hedge
I like preferred stocks for yield (6% - 9%) and relative safety. Most are issued at $25, and are likely to be called (repurchased) at that price at some time in the future. The best source of information that I know of is www.incomesecurities.com, published by Forbes columnist Richard Lehmann.Here's a snip from the latest issue of his Income Securities Investor newsletter:..."Note from reading our yield table that the yields on preferreds continue to run 100 basis points and more ahead of those for comparable bonds. This has nothing to do with comparable risk but everything to do with liquidity. As I have pointed out many times before, preferreds suffer from small issue sizes and low trading volume. This is good for small investors for precisely those reasons, i.e. the big boys can't play here."Good luck,Fred
Thanks guys. Great information. Quantumonline.com is a free site whereas Incomesecurities.com requires a subscription. Any thoughts on whis is better?
Thanks for reminding me about Quantumonline. I haven't used it in a while, but it's a great reference for looking up just about everything in the income security universe.Lehmann's subscription service differs in that it deals mostly with a few hundred bonds, preferreds, CEF's, and other income vehicles that he has positive opinions on. There are model portfolios for different risk levels, and there's discussion on each new recommendation, including ongoing buy/sell/hold recommendations as the investing environment changes. There's also a very detailed "user manual" that comes with the subscription, covering everything you need to know about income investing and using the service.The subscription price is fairly hefty, but you can sometimes save a few bucks by subscribing through the Forbes newsletter program. I'm retired, and gravitating more and more to income investing, so I find Lehmann's Incomesecurities.com well worth the $$. I should also add that I've made many times the cost of the subscription buying a few of the monthly recommendations, all securities I would never have noticed otherwise.Fred
Thank you Fred. I am considering giving Lehmann's service a try after reading your post and visiting the site. I am close to retiring and I, like you, am gravitating more and more to income investing for my taxable account. My retirement account is still mostly in equities via mutual funds (CF's). But I'd like to structure the investments in the taxable account for tax exempt income (bonds and funds)as well as qualified income from preferreds, CEF's, etc. Of course if the yields are high enough they may not have to be qualified. In any event, the Lehmann site looks like fetile ground for quality offerings. Are you also invested in bonds and/or bond funds?
To each his own, jahcpa. But personally I don't think you need to subscribe to a service to research preferred issues. Bond rating, maturity, call info, and yield are the main concerns. From there, working with issues from well known exchange listed companies makes it easy to check out the company's financial health, and note changes in fortunes from ratings and recommendations on the common stock.That and some decent rules for diversification--not too much in any one issue--are all most of us need to be reasonably successful in preferred investing.Of course it helps to have a good handle on future changes in interest rates. But right now they look pretty stable--not likely to rise very much if at all.
We own no bonds (mainly because they can't be bought & sold on-line in our brokerage accounts), but we have preferreds, Income CEF's and a few core stocks that we've owned for a long time. I'm currently interested in a few Option Strategy CEF's such as JSN & BEO. These yield in the 9 - 10% range and come with some interesting tax characteristics. Most of these trade at a premium to NAV, so I'm not chasing them. If you sign up for Lehmann's service, download the March 2006 issue to read his write-up on the class.We've also bought a lot of Canroys (HTE, CNE, & PWI) since the Canadian government dropped the tax bomb on them last fall. Risky, but the lure of 12%-18% returns was just too much. So far so good with them, but we have to keep an eye on the price of oil & gas.Finally, we plan to put some some of the extra cash in muni CEF's. Most pay around 5% tax free, and sell at a discount to their NAV. All CEF's are liquid, so we can sell them whenever something better comes along, and still beat a MMF return. And if the discount ever tightens up, there's a chance for a modest gain.Good luck, and let me know what you think of the service.Fred
Fred,Thanks for all the info. You're doing what I am planning on doing. Right now almost all the funds in the taxable account are in short term muni paper bought by a broker. I plan on taking the funds shortly and managing them through my Schwab account. I've been looking at muni CEF's to park the money while I read, learn and plan a strategy. I like the idea of muni bonds, income CEF's and preferreds (as tax advantaged as I can make them since this is a taxable account)along with core equity holdings.Regards from New York City,Jerry
My 2 cents on prefferred: Value Line used to offer a 2 or three month introductionary subscription for $75 to their convertible/prefferred newletter. You could get a listing of every preferred stock worth knowing about. Some factors like being convertible to common stock, or being not callable can make prefferreds a better choice than bonds. But all else being equal, it is my understanding that bonds are "preferred" (sorry)over preferred stock for the individual investor. The returns on bonds are often comparable to the dividends on the preffereds. In case of default, bankrupt filings, etc, bond holders will be paid ahead of owners of prefferred stock. The only ones who have a big advantage in owning preferred stock over bonds are other companies...they get some special tax break on divedends they recieve from prefferred stock. This same tax break is not available to individual investors. I'm relying on stuff i learned about 20 years ago, so do you own research before buying. And maybe some regulations have changes since then. If the yield of a preferred stock is above that of the bonds issued by a good stable company, I'd have no problem buying the preferred. Sorry for the spelling errors.
Sorry for the spelling errors.No problem like your thoughts.I have the same problem, have found this free program a wonderful help.http://www.iespell.com/
I've read this thread (and others) on preferred stocks. Rather than buying individual issues, I'm considering a preferred stock fund, such as the one Nuveen offers (symbol JTP). I notice that the NAV of that fund (XJTPX) has dived recently (due to rising bond rates), as has the offer price for JTP.I'm looking for fairly stable income stream with low to low/moderate risk. Thanks!Fungi
I'm looking for fairly stable income stream with low to low/moderate risk. What do you mean by "low to low/moderate risk"?Are you talking about risk to income stream, risk to quicksale value of investments, or risk to longterm value of investments?What goal are you trying to accomplish, that makes you think stable income + low risk is a good fit?
Thanks for asking, jrr7. In reply:What do you mean by "low to low/moderate risk"? Are you talking about risk to income stream, risk to quicksale value of investments, or risk to longterm value of investments?>> I would be uncomfortable eating a loss of, say, more than 10 percent of my investment if I decided to sell at some point over the next 5 to 10 years.What goal are you trying to accomplish, that makes you think stable income + low risk is a good fit?>> My wife and I are in our late 50s. We would like to retire within the next couple of years and live comfortably but not extravagantly off our nestegg. We've got approx. $800K in CDs, stock, and cash, approx $620K in TIAA, a paid-off house, and other paid-off real estate with a value of approx $450K. Zero debt -- none. We started from scratch and worked hard to get where we are. We want a stable income stream to live on, and I want to sleep peacefully at night after carefree days spent paddling my canoe and doing volunteer work.Fungi
I would be uncomfortable eating a loss of, say, more than 10 percent of my investment if I decided to sell at some point over the next 5 to 10 years.So if you had an investment, and it went down 20%, would you get nervous or would you be willing to wait another 1-2 years to see if it came back?Some types of investments have temporary drops that last for years, but then return back to par value.One way of setting up something like this is a CD ladder or bond ladder. Your payouts stay the same (until a maturity) and you are guaranteed to get your principal back eventually, and you have options for cashing in early.
So if you had an investment, and it went down 20%, would you get nervous or would you be willing to wait another 1-2 years to see if it came back? Some types of investments have temporary drops that last for years, but then return back to par value.>> I have individual stocks that go down 20% (e.g., a number of REITS lately), and that's OK ... because I have confidence in the managers (e.g., Kimco, Vornado, Boston Pptys), and they are modest positions. But I do not want a situation in which a large chunk of my investments (say, half) dropped 20%. Chalk it up to a matter of personal taste.One way of setting up something like this is a CD ladder or bond ladder. Your payouts stay the same (until a maturity) and you are guaranteed to get your principal back eventually, and you have options for cashing in early.>> Yes, I have that. What I'm scouting around for is something that might provide a somewhat fatter income stream if I'm willing to stomach *a little bit* more risk. Hence my query about a buying a basket of preferreds. If the answer turns out to be "just stick with what you're doing," that's fine.
Missash thinks that carefully chosen pfds. have a place in a diversified income portfolio....Brucedoe pointed out one "danger", i.e. if there is a change in control of the company you MAY be left with a non-trading security...Another downside to pfds. imho is that their call is entirely at the discretion of the issuing company. More than likely, a high "coupon" pfd. will be called(at or after the 1st call date)at a time when the cash received cannot get the same yield. I try to buy high yielding Reit pfds. at a discount. Like, right now the NRF-PA is priced at about $24 with 4+ years to 1st call. The yield at this price is between 8-9% on today's price....I like Reit pfds. because 1)I like Reits and 2)the dividend on the pfd. MUST be paid if the company is paying a common dividend and Reits must, by law, pay out 90% of their taxable income; thus, the pfd. investor has a "cushion". For anyone interested in learning more, this has been discussed several times on the Reit board in the last couple of years and there is a section on pfds. in the Reit FAQs.....read the posts on this subject by Ron Donohue
2)the dividend on the pfd. MUST be paid if the company is paying a common dividend and Reits must, by law, pay out 90% of their taxable income; thus, the pfd. investor has a "cushion".You're making me warm up to Fido's Real Estate Income fund which holds REITs, REIT preferreds and other REIT debt/stock. The only problem is the 0.8x ER. However, it does have a 0.4x correlation to REITs and 0.2x correlation to the S&P 500.I'm not too sure about buying when interest rates are rising. Shouldn't preferreds be considered long term bonds? They also seem to be like mortage backed securities. Declining interest rates result in calls/refinances and rate increases result in loss of capital.Paul
<<<<<<<<<<<<I'm not too sure about buying when interest rates are rising. Shouldn't preferreds be considered long term bonds? They also seem to be like mortage backed securities. Declining interest rates result in calls/refinances and rate increases result in loss of capital.>>>>>>>>> Yes, pfds. react like bonds to changes in interest rates.....
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