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Preferred stocks vs. paying off mortgage
Old 09-23-2008, 09:16 AM   #1
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Preferred stocks vs. paying off mortgage

BAC cumulative preferreds are yielding 8.5% to 9%.
USB cum pref's are yielding around 8.25%.

True, these aren't risk free. Not FDIC insured, junior position, dividends can be deferred for 5 years, volume is low, spreads are somewhat high (2%), etc.

If you have enough assets such that paying off your mortgage is a reasonable option, why wouldn't it be better to put the money into a diversified portfolio of preferreds like these instead of paying off the mortgage?

No wild swings of gains & losses like stocks, so no worry about having to liquidate at a loss for living expenses. Earn 8.5% in dividends and pay 6% on the morgage, making a net profit of 8.25% plus the possibility of a capital gain if it gets called at par.

Am I missing something?
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Old 09-23-2008, 09:36 AM   #2
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Quote:
Originally Posted by rayvt View Post
BAC cumulative preferreds are yielding 8.5% to 9%.
USB cum pref's are yielding around 8.25%.

True, these aren't risk free. Not FDIC insured, junior position, dividends can be deferred for 5 years, volume is low, spreads are somewhat high (2%), etc.

If you have enough assets such that paying off your mortgage is a reasonable option, why wouldn't it be better to put the money into a diversified portfolio of preferreds like these instead of paying off the mortgage?

No wild swings of gains & losses like stocks, so no worry about having to liquidate at a loss for living expenses. Earn 8.5% in dividends and pay 6% on the morgage, making a net profit of 8.25% plus the possibility of a capital gain if it gets called at par.

Am I missing something?
Yes, there is still a lot of uncertainty within the market and specifically within bank stocks. Don't think shareholders will get off scot free on these bailouts. Preferred shares can be significantly affected if the government takes a stake as it did in AIG.

Two factors are likely to be affected. Share price and the liquidity of the asset. There is no free ride so the interest rate is telling you there is great risk in the preferred shares. Buy at your risk.
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