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

[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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by 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.

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]

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Originally Posted by Coolius 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]

Quote:

Originally Posted by 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.

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]

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Originally Posted by Mulligan 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. Sent from my iPad using Tapatalk

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]

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Originally Posted by Mulligan 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.... Sent from my iPad using Tapatalk

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]

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Originally Posted by tmm99 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]

Quote:

Originally Posted by tmm99 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]

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Originally Posted by Coolius 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]

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Originally Posted by 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.

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]

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Originally Posted by Mulligan 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%. Sent from my iPad using Tapatalk

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.

[Coolius]

In typical thin trading action, AILLL has rebounded from the sell this morning. Bid is now 500 @ $26.25. A good example of strong hands not panicking and selling just because of one Nervous Nellie who wanted out for whatever reason.

To address Cooch96 question, yes, there is always interest rate risk. If rates went back up to 5%-6%, no doubt the stocks we have been discussing would be adversely affected. But so would everything in the income universe - and much of the growth universe - and the bond universe.

But if one were to take the position rates will rise slowly, taking perhaps 2-3 years to reach 3%, then holding a 6% yielding preferred continues to make sense.

As Mulligan has stated, long term charts of such Trapped Preferreds have shown price stability and resilience during periods of high interest rates; perhaps that is not good enough for many investors, and they decide to stay away. And that's a sensible decision for them, they have to be comfortable and be able to sleep well at night.

But its good to do your own DD, and come to a conclusion that you can live with, accept the risks, and be within your comfort zone.

[Mulligan]

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Originally Posted by cooch96 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.

Yes, if inflation rose to say late 70s level, the price will drop. I saw CNLPL traded in upper 30's when interest rates were double digits early 80s. But, I don't really worry as it is just an income generator. I will never sell anyways...But yes, I am betting over a period of time a safe 6.2% yield from CNLPL will always be better. But look at a 20 year price history of fairly "normal" interest rates and you will see it always trades around par $50 even in 4-5% 10 year rate. Because even when 10 year is that high (which 5% hasn't happened in 20 years much) you still cant find many opportunities to get investment grade investments at the 6-6.5% yield.
The other question on calling is yes, Ameren or any corporation that issues the preferred stock are the only ones that can call it... Technically its only the Board of Directors from the acquired company that can call the issue. The holding company cannot because their Board of Directors do not control the company..But since the common stock of the bought out company is owned by the holding company they will install "their guys".
Illiquid doesn't mean you cant sell them. There will always be a market and the market makers will always have a support level bid. The only trouble would be if you owned thousands of them and needed to dump instantly that day.
We have not had high rates for decades, and I am personally not worried. We have been and will continue to follow Japans lead. This is just me, but I am not worried about double digit rates crushing these, I am worried about hanging on to extra safe 6% yields.


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[Mulligan]

Quote:

Originally Posted by 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 got this covered very well, but I will add this. These issues are not growth stocks. They are designed to trade "flat" around par.. They are technically an equity as the dividend paid comes from after tax earnings. That is why they are "15% tax qualified" because they are a dividend, not a bond which is taxed as interest. However, in all practicality, ( outside of the daily price wobbling) these trade like bonds because that is what they are competing against.


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[tmm99]

Quote:

Originally Posted by Mulligan Coolius got this covered very well, but I will add this. These issues are not growth stocks. They are designed to trade "flat" around par.. They are technically an equity as the dividend paid comes from after tax earnings. That is why they are "15% tax qualified" because they are a dividend, not a bond which is taxed as interest. However, in all practicality, ( outside of the daily price wobbling) these trade like bonds because that is what they are competing against. Sent from my iPad using Tapatalk

Makes sense. Thank you, Mulligan!

[tmm99]

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Originally Posted by Mulligan Illiquid doesn't mean you cant sell them. There will always be a market and the market makers will always have a support level bid. The only trouble would be if you owned thousands of them and needed to dump instantly that day.

So you may have to wait a few days to sell? (Again, I am just curious...)