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Old 12-28-2014, 11:46 AM   #61
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Too rich for me. Multi sector bond fund FSICX has a position, but I try not to look under the hood.
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Old 12-28-2014, 01:05 PM   #62
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Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative? You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.
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Old 12-28-2014, 01:13 PM   #63
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Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative. You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.
Great point....I was wondering the same thing, recently. I personnally have no experience with preferreds, but heard something that piqued my interest. This topic is probably worth a seperate thread.
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Old 12-28-2014, 02:24 PM   #64
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I don't own preferred stock instead of bond funds because my fixed income allocation is there to diversify against my equity funds.

If you are focused mostly on dividend income it might make sense.
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Old 12-28-2014, 03:48 PM   #65
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The dividends for preferred are fixed amounts like a bond; and are usually paid quarterly whereas a bond pays semi-annually. Some issues are marketed as "trusts" and are issued by the investment banks for other entities; and those dividends are paid as interest. A etf symbol, PGX, pays monthly because of the various preferreds it holds. I believe it is worth a look see as a portion of a fixed income portfolio.
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Old 12-28-2014, 04:26 PM   #66
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In 401k, Stable Value and TIPS. In IRA's Metropolitan West Unconstrained Bond (MWCRX). In taxable Vanguard Intermediate Term Muni Fund (VWITX).
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Old 12-28-2014, 06:32 PM   #67
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Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative? You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.

Glad to see you are the brave one! I have thought about bringing this up, but thought I would get razzed for it. I have been getting some tips through a few posters here that I will not mention and let them chime in if they want. If you know what you are doing and know the advantages and disadvantages before buying, I like them. I stay at that $5k per and under myself. I'm starting to branch out but I have been buying relatively illiquid investment grade utility prefereds. One has been paying without a missed payment since it's 1968 issue. Pays me 6.25%. Clip the coupon and move on.


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Old 12-28-2014, 06:41 PM   #68
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What is the interest rate risk with preferreds? Wouldn't it be similar to a long maturity zero coupon bond?
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Old 12-28-2014, 06:44 PM   #69
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The problem with preferreds is negative convexity.


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Where are you putting your fixed income/ bond investments?
Old 12-28-2014, 06:52 PM   #70
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Where are you putting your fixed income/ bond investments?

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What is the interest rate risk with preferreds? Wouldn't it be similar to a long maturity zero coupon bond?

That is the fun part with studying preferreds... Simple in theory but so many options...kind of like wanting to eat some candy....many types to choose from. Some are indefinite, some are fixed, some convert later from a fixed rate to fixed plus Libor. Others are adjustable plus Libor right out of the gate. All will respond differently a bit based on interest rate changes. Buying above and below par also comes into play a bit as you don't want to buy one significantly above par and then have it called on you. As a general rule the fixed perpetual cumulative preferred investment grade utilities are running between 4.75%-6.5%. The lower rates are ones that are below par and have a chance for capital gain if called. The higher ones are generally older higher rate payers that are a bit above par and you run the risk of losing some capital if called.
I have been buying at the upper rate end just above par and buying only after next dividend has been declared that would recapture any capital loss on a slight chance of a call.
Also, obviously, generally the higher the "safety" of the company the lower the rate.


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Old 12-28-2014, 09:16 PM   #71
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That's right. That's why I don't invest in junk/high yield bond funds directly - because they act like stocks, and I use bonds and cash as diversifies for my stocks.
I agree with all the comments on Fidelity Floating Rate. It is a high yield fund and should be viewed as such.

Nonetheless, it is about 15% of my bond allocation, which also includes a corporate, foreign, and munis, as well as a large allocation to mixed bond funds (Loomis Sayles Bond, Fidelity Total Bond, and PIMCO Total Return). I'm also re-averaging into an intermediate Treasury fund, which served me well in '08-'09. I was afraid of money markets going down in '06, which was more accurate even than I feared, but now I also have 10% in MMs.
The muni closed end funds, by the way, are among my largest gainers this year, other than biotech and a couple other funds, but they are leveraged.
I don't mind harvesting yields while the NAVs go down, when I start withdrawing, although rebalancing can be tricky
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Old 12-29-2014, 06:43 AM   #72
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Blend of intermediate maturity bond index fund and a five year zero coupon ladder.
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Old 12-30-2014, 11:56 AM   #73
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That is the fun part with studying preferreds... Simple in theory but so many options...kind of like wanting to eat some candy....many types to choose from. Some are indefinite, some are fixed, some convert later from a fixed rate to fixed plus Libor. Others are adjustable plus Libor right out of the gate. All will respond differently a bit based on interest rate changes. Buying above and below par also comes into play a bit as you don't want to buy one significantly above par and then have it called on you. As a general rule the fixed perpetual cumulative preferred investment grade utilities are running between 4.75%-6.5%. The lower rates are ones that are below par and have a chance for capital gain if called. The higher ones are generally older higher rate payers that are a bit above par and you run the risk of losing some capital if called.
I have been buying at the upper rate end just above par and buying only after next dividend has been declared that would recapture any capital loss on a slight chance of a call.
Also, obviously, generally the higher the "safety" of the company the lower the rate.
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My experience has only been buying stocks/etfs/mutual funds in a brokerage account.
Do you buy preferreds directly like other stocks in a brokerage account ?
Or do you buy an etf of preferreds ?
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Old 12-30-2014, 12:18 PM   #74
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My experience has only been buying stocks/etfs/mutual funds in a brokerage account.
Do you buy preferreds directly like other stocks in a brokerage account ?
Or do you buy an etf of preferreds ?

I personally have been buying individual preferreds to get the rates I want and avoid the expenses ratios. That is violating the diversity rule, but in reality most true preferreds are not diverse sector wise as most are either insurance, banking, or utilities.
Yes, you buy them through a brokerage account like a stock. Some of these sell OTC and you may have to call broker. The first one I bought I had to do that, but subsequent ones I have not.
More liquid ones such as CHSCM are listed on NASDAQ and are pretty liquid. Others like old utility issues such as CNLPL (Connecticut Light and Power bought out by Northeast Utilities are on OTC which means you need to be careful with the bid/ask price. Do not ever buy a "market order" assuming you will get current last trade.
For example, BGLEH (Baltimore Gas and Electric owned by Exelon now I believe) last traded at $102 with a 6.75% dividend. But it has an ask price of $150 which is just a crazy number no one would buy at unless they hit market order as some of the ones I dabble in are not highly liquid.
I am no expert and a few forum members have helped me out a lot and I have read a lot. Plus my desires may not be normal. I'm slowly buying them and just want to clip coupons. I will never sell, so current price will not bother me. Always be aware of Par and call dates. Though one I bought could have been called 30 years ago and hasn't yet.
quantumonline.com is an excellent place to start digging in to research them.


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Old 12-30-2014, 03:36 PM   #75
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I always try to buy my preferreds below par through Fidelity. Originally I purchased an etf, which I still own, but have purchased many to build my own etf, in order to keep fees low. I believe if you google "preferred stocks below par", you will get a link to a list of preferreds way under par to those over par, as well as some past income portfolios. You can do your own due diligence, I buy about 200 of each issue to limit my exposure. Just like when I buy a bond, I do not pay a premium. I have only been burned twice, in GM and Freddie Mac; however I bought those way under par more for speculation than for income. You will be pleasantly surprised; just remember me in your prayers......
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Old 12-30-2014, 03:49 PM   #76
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I always try to buy my preferreds below par through Fidelity. Originally I purchased an etf, which I still own, but have purchased many to build my own etf, in order to keep fees low. I believe if you google "preferred stocks below par", you will get a link to a list of preferreds way under par to those over par, as well as some past income portfolios. You can do your own due diligence, I buy about 200 of each issue to limit my exposure. Just like when I buy a bond, I do not pay a premium. I have only been burned twice, in GM and Freddie Mac; however I bought those way under par more for speculation than for income. You will be pleasantly surprised; just remember me in your prayers......

I am pretty new to the game, and historically speaking, preferred prices are not "cheap" now. Most of the types of preferreds I am interested in now are generally slightly above par as many were issued when rates where generally higher. The ones that I am looking at (mostly utilities) only have below par issues that also offer low paying yields. I am not trying to snag any capital gains though I risk them being called. The four recent ones I purchased all have spit out their next dividend that covers the call price difference already. I hope they do not get called but that is the risk I am taking to get the higher yield.
Though not intending to ever sell, I do take some comfort in knowing "the spread" between 10 year treasury and utility preferreds is wide now compared to 2006 when the 10 year was above 4%. In fact the price of the preferreds I own are about the same now as they were then prior to the "new low rate interest era".


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Old 12-30-2014, 04:24 PM   #77
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I've got TIPS (2.63% coupon) and stable value (at around 2% now) in the 401k. I don't mind individual bonds, but am not convinced bond funds are a very good deal for the long term investor. I hadn't thought too much about preferred stock, but then again, I'm not the an individual stock picker type.
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Old 12-30-2014, 05:05 PM   #78
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I've been a recent buyer of some CHSCM mostly as a dividend play. Currently selling very close to par. Moved some short term bond fund money to CHSCM.
It is issued by a huge agricultural coop that does not have a common stock.
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Old 12-30-2014, 05:12 PM   #79
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I've been a recent buyer of some CHSCM mostly as a dividend play. Currently selling very close to par. Moved some short term bond fund money to CHSCM.
It is issued by a huge agricultural coop that does not have a common stock.

That is where my 2015 HSA contribution is going once the calendar turns.... Until a few weeks ago I had never heard of this company despite it being a Fortune 100 company. Last years earnings covered preferred payouts by 30 times, I read. One to sock away into the vault and forget I hope.


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Old 12-30-2014, 05:19 PM   #80
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That is where my 2015 HSA contribution is going once the calendar turns.... Until a few weeks ago I had never heard of this company despite it being a Fortune 100 company. Last years earnings covered preferred payouts by 30 times, I read. One to sock away into the vault and forget I hope.


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I looked at this company a while ago but never pulled the trigger. This may be a good place to put some fixed income dollars. Looks like the price has a floor of $25 which was the issue price. Yields about 6.6% plus they are in the refining business and supply fuel from their Cenex stations.

CHS Inc. prices public offering of preferred stock at $25 per... -- ST. PAUL, Minn., Sept. 9, 2014 /PRNewswire/ --
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