Preferred Stock Investing-The Good , The Bad and The In Between 2015 - 2020

[Mulligan]

I have the MMF (Mulligan Mutual Fund):

AILLL
CNLPL
CNTHP
WFCPR-L
OSBCP
MNRPRA

Cap, If you called Cramer and asked.... "Am I diversified?". He would answer... "Most definitely". Of course that is a lie as he wouldn't know what the hell those ticker symbols were. I have humored myself thinking about calling him on "Lightening Round" and asking him his thoughts on CNLPL.


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[Coolius]

Hey, we cheap bastards counter big spenders like you, Mulligan.

My CNLPL bids are not an opportunity cost, as I have a full position already.

Just hoping to be a - ahem, cheap bastard - and pick up more on anybody's dump.

I see that someone is bidding $52.75 for CNTHP. Somehow, I doubt that is any of us cheap bastards...... Could be a big spender, or a Mulligan convert.

 

[Mulligan]

Hey, we cheap bastards counter big spenders like you, Mulligan.

My CNLPL bids are not an opportunity cost, as I have a full position already.

Just hoping to be a - ahem, cheap bastard - and pick up more on anybody's dump.

I see that someone is bidding $52.75 for CNTHP. Somehow, I doubt that is any of us cheap bastards...... Could be a big spender, or a Mulligan convert.

We must have different screens as mine shows $52.50 as high bid. Considering we are 3 months away from next exD, $52.75 is a bit rich even for someone who is loose with his bids like me.


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[Coolius]

We must have different screens as mine shows $52.50 as high bid. Considering we are 3 months away from next exD, $52.75 is a bit rich even for someone who is loose with his bids like me.


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My screen shows CNTHP highest bid @ $52.75, lowest ask $54.75. Last trade @ $52.50.

I do show CNLPL highest bid @ $52.50, lowest ask @ $53.45. Last trade $53.45.

Zero volumes for the day in both, very nice and stable.

 

[Mulligan]

My screen shows CNTHP highest bid @ $52.75, lowest ask $54.75. Last trade @ $52.50.

I do show CNLPL highest bid @ $52.50, lowest ask @ $53.45. Last trade $53.45.

Zero volumes for the day in both, very nice and stable.

Duh, my bad...I switched out of issues on screen and forgot...yep its the same.


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[Coolius]

CNTHP has declared its dividend, $0.82, exDiv Jan 6, Pmt Feb 1.

To be one div above redemption value, buy has to be at $52.26 for those seeking to get it.

Unfortunately, the Bid/Ask is much higher, $52.75/$54.75.

Again, patience has to be maintained, do not chase.

Folks who got CNTHP at $52, $52.20, or around that price should be pleased. Your cost basis will go below redemption value after Feb 1, and you are now riding the gravy train as it leaves the station.............just hope it doesn't get called....

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Closed out the year with some minor trades and additions... Added 200 more shares of CHSCL, re-entered OSCBP with 400 shares, and added an insurance trust KCC of 100 shares. Sold off some 5% yielders in AILLI and PPWLM at profits plus dividends. Hey if someone was willing to pay almost $15 per share more than I did this summer, Im always glad to sell..
Ending year with these preferreds in the starting lineup.... AILLL, AILNP, CNLPL, CHSCL, BGLEI, WFC-L, AHT-D, BGE-B, KTH, KTBA, KCC, OSBCP, MNR-A, AES-C, and GJP.
Have a trade or 2 more in January, when I sell a common stock for a nice gain.


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[Coolius]

Hope that some of you were able to pick up WFC-L when the price was in the $1,142-$1,155 range last month.

It has gone up nicely since last week; perhaps because of a recent Barron's article mentioning it as well as BAC -L.

In my opinion, it is a great buy & hold issue. No call risk, Investment grade, Qualified Dividend, and strong parent. The only real risk is if interest rates rise appreciably, which I think will not happen for a couple years, if not longer.

Next exDiv is late February, dividend is $18.75 per share.

 

[Mulligan]

Picked up 400 more shares of AILLL yesterday at $26.20. Goes exD this week. Already own thousands so a few hundred more added to the collection wont hurt.


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[Mulligan]

Im like a kid with his allowance, and just blow through all my money. Yesterday and today bought some more utility trust preferreds in KTH and AES-C, positions I already own. Started wading in with BGEPF, an
Ag convertible. Will be adding to that here and there this year when my allowance hits my pocket.


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[Free To Canoe]

I bought the koolaid and took the plunge. My order for 500 shares of AILLL went through today at $26.20.
I think there is a place in my portfolio for preferreds. Helps to counter the low interest rate sameness. It has been a good ride so for preferred and it could go on for a while. Definitely a better idea than the church bonds.

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

I bought the koolaid and took the plunge. My order for 500 shares of AILLL went through today at $26.20.
I think there is a place in my portfolio for preferreds. Helps to counter the low interest rate sameness. It has been a good ride so for preferred and it could go on for a while. Definitely a better idea than the church bonds.

My favorite and I am loaded to the gills and will always consider more. Only risk is call risk, the payments are automatic... This is what I like about preferreds from bought out companies that have holding companies own them... Most people incorrectly assume senior bonds of a holding company are higher in safety than the preferreds. They would be wrong...Loosely speaking, the holding companies profits are derived from the dividends they receive from the ownership of the bought out common shares they posses. If they cant get their dividends they cant make their payments. But by contract, they cant get their dividend until they pay the preferred owners of the bought out company. Throw in "ring fenced" protections of bought out company, cumulative preferred, monopoly, guaranteed ROE, no power plants only distribution and this is a sleep at night issue.


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[Coolius]

I bought the koolaid and took the plunge. My order for 500 shares of AILLL went through today at $26.20.
I think there is a place in my portfolio for preferreds. Helps to counter the low interest rate sameness. It has been a good ride so for preferred and it could go on for a while. Definitely a better idea than the church bonds.

You will notice that a total of 780 shares of AILLL traded today; FreetoCanoe got 500, the other 280 were sold to me, for $26.10.

Tomorrow is exDiv day for AILLL.

If this year is anything like what the first 3 days have shown, it will be a tough time for Total Return investors. Sluggish growth, gradual rate rises, low commodity prices, and geopolitical black swans.

Income investors might fare better, but who knows?

 

[Mulligan]

You will notice that a total of 780 shares of AILLL traded today; FreetoCanoe got 500, the other 280 were sold to me, for $26.10.

Tomorrow is exDiv day for AILLL.

If this year is anything like what the first 3 days have shown, it will be a tough time for Total Return investors. Sluggish growth, gradual rate rises, low commodity prices, and geopolitical black swans.

Income investors might fare better, but who knows?

Ya, I got in at $26.20 yesterday. Not a great price point but its really $25.79 as the divi was captured. And its painfully hard to get it there. You may see one small trade there, but it more than likely wont be yours and it locks up. Since I will hold forever and treat it as income only, getting basement price isn't a top priority as opposed to not getting it at all.
I agree, Coolius. just like last year this environment is perfect for quality preferreds. This issue was originally a par 6.625% when 10 year was around 5%. Now it yields about 6.3% with a 2.2% 10 year. Due to the yield trapped nature issue, we have several hundred basis points to play with before any appreciable price degradation would occur. And at Baa2 rating which is better than many senior company bonds a premium will always be there for it.


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[Coolius]

I'm pleased whenever I see our forum members buying these Trapped Preferreds; I know they are likely to be " strong hands " who are in for the long term, and will not dump their shares at any rumor or hint of market problems.

The more shares in the strong hands of ER members, the better.

 

[Mulligan]

I'm pleased whenever I see our forum members buying these Trapped Preferreds; I know they are likely to be " strong hands " who are in for the long term, and will not dump their shares at any rumor or hint of market problems.

The more shares in the strong hands of ER members, the better.

That is why I like one of my prized issues. Less than 40 people own it from what I have read and hasnt traded a 100 shares in 2 years... No price movement at all...But a sweet 7.11% every 3 months....


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[Free To Canoe]

My favorite and I am loaded to the gills and will always consider more. Only risk is call risk, the payments are automatic... This is what I like about preferreds from bought out companies that have holding companies own them... Most people incorrectly assume senior bonds of a holding company are higher in safety than the preferreds. They would be wrong...Loosely speaking, the holding companies profits are derived from the dividends they receive from the ownership of the bought out common shares they posses. If they cant get their dividends they cant make their payments. But by contract, they cant get their dividend until they pay the preferred owners of the bought out company. Throw in "ring fenced" protections of bought out company, cumulative preferred, monopoly, guaranteed ROE, no power plants only distribution and this is a sleep at night issue.


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I appreciate being able to have a seat at the Preferred Stock classroom. Thank you and the others for your contributions. Would I take a 6% risk free return and give up all of the other opportunities in the marketplace? At this point in my life, YES.
"Risk free" and Preferred stock should never be used in the same sentence. I believe that the risks have been minimized in their beautiful wickedness for the limited issues discussed.

 

[tmm99]

That is why I like one of my prized issues. Less than 40 people own it from what I have read and hasnt traded a 100 shares in 2 years... No price movement at all...But a sweet 7.11% every 3 months....


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I don't know investing, and this preferred stock talks are way beyond my understanding, but I like to read things I don't quite understand

Anyway, can someone tell me, if these are such great buys, how come not many people own it? If one could get 7.11% every 3 months and they are "preferred" stocks, I would think everyone would be flocking to it? I'm sure I am missing some key understanding here...

 

[Mulligan]

I don't know investing, and this preferred stock talks are way beyond my understanding, but I like to read things I don't quite understand

Anyway, can someone tell me, if these are such great buys, how come not many people own it? If one could get 7.11% every 3 months and they are "preferred" stocks, I would think everyone would be flocking to it? I'm sure I am missing some key understanding here...

Preferred stocks are "complicated" "simplicity".... Actually they are far easier to understand than it appears... I will use the 7.11% example... Just for simplicity purposes lets consider this a "bond issue" (its not but at this point that doesnt matter). My above example is was an original 10 million float, $100 par, 7.75% yield by a central Illinois power company. That means 100,000 shares were issued... Energy company Dynegy then proceeded to want to buy this company out. "Old preferred" stockholders have major power over buyouts...Dynegy needed to get control of the preferreds to get control of company
So they through a buyout offer with sweetened additional cash to sell, and 96% of owners sold out.. Dynegy was then able to take over company, they just left the 4% outstanding which is about 4,000 shares.
Fast forward Dynegy then sells the company to Ameren. Ameren now controls the 96% of the stock and just let the other 4% continue to float in market.. So reason there are only such few owners because there are very few shares left outstanding.
I bought them at $108, so I dont get the 7.75 yield, I get 7.17%. I guessed in earlier post at 7.11, but it is $7.17%.


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[Coolius]

I don't know investing, and this preferred stock talks are way beyond my understanding, but I like to read things I don't quite understand

Anyway, can someone tell me, if these are such great buys, how come not many people own it? If one could get 7.11% every 3 months and they are "preferred" stocks, I would think everyone would be flocking to it? I'm sure I am missing some key understanding here...

The main reason, IMO, why such stocks remain at attractive levels is that they have been mostly ignored by the mainstream financial press.

Preferred stocks have been sorely misunderstood for a long time - I read constantly in other sites ( SA, IV, Morningstar, Bogleheads etc ) - so many investors consider them toxic and stay far away.

One poster even maintained that Preferred Stocks have " all the disadvantages and none of the advantages of common ".

And, hey, that's fine by me. They have their investing philosophy, and should follow that. And I see it as less turmoil in the sector from weak hands.

The preferreds that we have been mentioning in this thread tend to be in stronger hands, very thinly traded. Traders shy away from such stocks as there is no profit from trading. Institutions do not play here as there is insufficient liquidity due to low daily volumes.

I believe that such stocks will continue to reward the few who understand them and willing to do their DD accordingly.

For example, look at Mulligan's favorite today - AILLL. I bought yesterday @ $26.10. Today is exDiv for 40 cents/sh. The bid today is $26.26 - HIGHER than yesterday. Zero volume. No one selling to move to other stocks, no one playing capture the dividend games. Strong hands holding. What is there to dislike about that ?

Edit at 8:00 am PST: Someone bought at $26.45. So now the high bid is $25.85. Ask $26.45.

 

[Mulligan]

The main reason, IMO, why such stocks remain at attractive levels is that they have been mostly ignored by the mainstream financial press.

Preferred stocks have been sorely misunderstood for a long time - I read constantly in other sites ( SA, IV, Morningstar, Bogleheads etc ) - so many investors consider them toxic and stay far away.

One poster even maintained that Preferred Stocks have " all the disadvantages and none of the advantages of common ".

And, hey, that's fine by me. They have their investing philosophy, and should follow that. And I see it as less turmoil in the sector from weak hands.

The preferreds that we have been mentioning in this thread tend to be in stronger hands, very thinly traded. Traders shy away from such stocks as there is no profit from trading. Institutions do not play here as there is insufficient liquidity due to low daily volumes.

I believe that such stocks will continue to reward the few who understand them and willing to do their DD accordingly.

For example, look at Mulligan's favorite today - AILLL. I bought yesterday @ $26.10. Today is exDiv for 40 cents/sh. The bid today is $26.26 - HIGHER than yesterday. Zero volume. What is there to dislike about that ?

The "disadvantaged" quote above you mentioned is used often by the ill informed. Most are either brain dead or don't realize there are more preferreds out there than just trash junk companies issuing them to try to survive.
Granted the area is a small sandbox to play in, but at my asset level, I have plenty of room to play in it. The junk preferreds have little protections, the majority of mine have many. But the key is this...We are getting in essence "investment grade bonds" at "high risk" yields. Nowhere in the bond market will you get 400 bp's above 10 year treasury. Im not trying to beat the stock market in returns, though the last 18 months I have been stomping it. I am just trying to achieve maximum yield at maximum safety which is what these issues provide. I will take 6-7% every year....


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[Mulligan]

Tmm 99, since you are curious and I like discussing it, I will give you an example of what I did today. Now keep in mind I am no "King Pin" and usually trade small except in my "Big 3". I decided BGE-B was being bid up too high so I cashed out 300 shares at $26.60 as effective yield is getting low. Its in my Roth so all cap gains are tax free.
Now I turned around and bought 300 shares of KCC ( insurance company named Unum). I had a 100 shares and it usually doesn't trade much but someone is needing to sell, so I bought 300 shares at $28.75.
This is a yield switch play. I in effect traded a 5.8 ish yield for a 7.16% yield and this is also an "investment grade" issue. Now this is called a "preferred" but it technically is a "trust preferred" so it is higher up on the safety chain than a traditional preferred. But it is not "15% tax qualified" and is treated as "income". So I need to keep these in Roth for tax purposes. This is an insurance company that is conservatively ran capital structure wise.
So what is the risk? Well it is above par and past call date.. The interesting part though is par $25 price is not the call price which is $27.68. Its next dividend comes in March. If we make it to there, I suffer no capital loss. After that it is just gravy and 7.16% yield. It has had a partial call a few years ago, and nothing since. Since it takes 30 days for a call, I am about home free anyways... I don't take gambles with safety...I take my gambles on call and minimal capital loss which has rarely happened.
It rarely trades and all the sudden almost 10 k have traded with price rising.. That is a good sign, because usually its one of two things...An institution needing to raise money, or someone trying to get out with maximum profits before a call at $27.68. Since it is rising, Im guessing the former. A safe calculated gamble here.


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[tmm99]

Thank you very much for all your posts trying to explain to a novice why you buy preferred stocks. It is interesting you mention that dividends from some preferred stocks are considered income, not dividends (great yield, but I guess you need to deduct some of it since the tax guy may take more from your profit depending upon your tax bracket)... Also I have noticed that the value of the stocks do not grow much (I imagine, due to low trade), but it doesn't sink either that I could tell.

 

[Coolius]

Thank you very much for all your posts trying to explain to a novice why you buy preferred stocks. It is interesting you mention that dividends from some preferred stocks are considered income, not dividends (great yield, but I guess you need to deduct some of it since the tax guy may take more from your profit depending upon your tax bracket)... Also I have noticed that the value of the stocks do not grow much (I imagine, due to low trade), but it doesn't sink either that I could tell.

tmm99,

As retirees, we are definitely interested in keeping as much of our dividend as possible from the taxman.

Many Preferred Stocks pay QDI - Qualified Dividend Income - which is taxed at preferential rates, as described below

For tax purposes, dividends are considered either “qualified” or “non qualified.” Qualified dividends are:

• Tax-free for those in the 10% and 15% brackets to the extent qualified dividend income remains within those brackets
• Taxed at a 15% rate for those in the 25% up to 35% tax brackets
• Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket

Before I make any decision on a Preferred Stock, I check it out on QuantumOnline, the site is excellent; it will indicate if the dividends from that issue are Qualified or not.


The Utility Trapped preferreds that Mulligan & I have been mentioning in this thread are, indeed, very thinly traded. It is not possible to determine any trend based on trades, as these are normally few & far between.

In my case, I monitor my watchlist, and if there is a seller for whatever reason, try and grab some before selling is exhausted. More often, I fail. But that's fine, opportunities will always come again.

As example, this morning, AILLL ( one of our favorites ) had a trade of 200 shares @ $25.85 - an attractive price. I immediately entered an order for 200 at that price, but the selling stopped. Probably just an individual, selling the day after exDiv.

Now watching to see if anyone else gets scared by that trade to the extent of dumping their shares as well - and I'm there to take them off their hands @ $25.85.

This week has been rough for stocks, but my income heavy portfolio actually went up a bit, less than 0.5%. Focusing on income and not portfolio NAV makes for restful sleep, even as the general market writhes & thrashes in agony.

 

[cooch96]

Preferred stocks are "complicated" "simplicity".... Actually they are far easier to understand than it appears... I will use the 7.11% example... Just for simplicity purposes lets consider this a "bond issue" (its not but at this point that doesnt matter). My above example is was an original 10 million float, $100 par, 7.75% yield by a central Illinois power company. That means 100,000 shares were issued... Energy company Dynegy then proceeded to want to buy this company out. "Old preferred" stockholders have major power over buyouts...Dynegy needed to get control of the preferreds to get control of company
So they through a buyout offer with sweetened additional cash to sell, and 96% of owners sold out.. Dynegy was then able to take over company, they just left the 4% outstanding which is about 4,000 shares.
Fast forward Dynegy then sells the company to Ameren. Ameren now controls the 96% of the stock and just let the other 4% continue to float in market.. So reason there are only such few owners because there are very few shares left outstanding.
I bought them at $108, so I dont get the 7.75 yield, I get 7.17%. I guessed in earlier post at 7.11, but it is $7.17%.


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So in this scenario, who retains the power to call? No one? Ameren?

And what is the risk to possible high inflation, say multiple years of low double digit? I'm guessing you just have to take the drubbing, since preferreds are illiquid, right? The consolation being that you're taking much less of a beating than folks heavily invested in low yield bonds?

Thank you for the education, his is surprisingly interesting stuff.