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Preferred Stock Investing-The Good , The Bad and The In Between
Old 01-08-2016, 10:28 PM   #281
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Preferred Stock Investing-The Good , The Bad and The In Between

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Makes sense. Thank you, Mulligan!

You are welcome, Tmm99. Just to piece it all back together again in conjunction with the tax understanding, let me add this back in.... That is why it is absolutely imperative that you only buy preferreds from high quality companies with continuous profitability and retained earnings on the books.
These things are meaningless pieces of papers for a bankrupt company as the bond holders get the assets. A company that doesn't make profits cannot pass this money unto preferred shareholders.
Companies with retained income can pay the divis even if they go through a period of unprofitability.
Many companies will issue these just as a way to get capital, because lenders wont let them borrow anymore...And lenders could care less how much preferred stocks they issue since it is below them in payment responsibility, unless specific covenants disallow this.
So...why go through all that crap, when you can just get utility preferreds, that are allowed a guaranteed return of equity by law, and have millions on the books in retained earnings. Sacrifice the percent or two in yield and get the sleep at night ones.
The market has been going to hell in hand basket the past week, and I actually have more money now, than what I had before the week started. If you are having problems sleeping at night, don't buy Ambian... Buy preferreds utility preferred stocks. Their price movements are so boring they will put you to sleep when you look at them daily.


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Old 01-08-2016, 10:36 PM   #282
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So you may have to wait a few days to sell? (Again, I am just curious...)

Lets say you had 5,000 shares of say CNLPL. You could punch sell for 5000. The exchange market should, break it down into 100-200 lot shares so it doesn't look like a huge dump on the market. If set at a fair price, it may take a couple days to clear them. If it is set at the high end ask price they could set for weeks... You could hit a market order, but that is a big NO NO.... There are always low ball bids hidden off the screen to fleece you at a low low price. You just have to be patient and let the process carry out.
Its never a problem to sell a few hundred shares...


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Old 01-09-2016, 04:32 AM   #283
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Checking back in here. I just wanted you to know Mulligan, and you too Coolius, that someone on this thread half jokingly suggested that you write a book on this subject or that this string be published as a tutorial. Well I have printed out the entire group of posts and add the new material every so often. I have flagged sections of it and separately printed out from Quantum on Line the individual discussion sheets on most of the issues mentioned together with recent quotes from Free Real Time Quotes. At this point I've purchased three of the issues and am bidding on a fourth. I've looked at KCC and am pondering it. I had decided to stick primarily to utilities but UNUM is located in my home town area and I like that fact. Many of my neighbors are execs at UNUM. I just wanted to thank you both and others who have shared their knowledge. Oh and Mulligan don't fear that I may have gone too far all in. Like you our income streams, separate from our portfolio, more than cover our expenses and our growing commitment to Preferred's is a tiny portion of our portfolio.dde09
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Old 01-09-2016, 04:44 AM   #284
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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. Sent from my iPad using Tapatalk
Mulligan; Could you tune me up on what "Structured Products" is to this market? KCC is such an issue. I've seen others. Are they an entity that facilitates on-going trading of Preferred's when the parent is bought out by another company? Do we need to be concerned about the health of this entity in and of itself? Why is the coupon of the various Structured Product issues different than the underlying coupon of the issue? And a final question, which you have addressed already, relates to the trust Preferred's and trust certificates. Why does that fact further protect an owner of an issue. Why did the issuer go Trust in the first place? Why are they further up the food chain? Thanks for my daily lesson!
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Old 01-09-2016, 07:49 AM   #285
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Mulligan; Could you tune me up on what "Structured Products" is to this market? KCC is such an issue. I've seen others. Are they an entity that facilitates on going trading of Preferred's when the parent is bought out by another company? Do we need to be concerned about the health of this entity in and of itself? Why is the coupon of the various Structured Product issues different than the underlying coupon of the issue? And a final question, which you have addressed already, relates to the trust Preferred's and trust certificates. Why does that fact further protect an owner of an issue. Why are they further up the food chain? Thanks for my daily lesson!

Good questions Golden. Let me break them down in two posts and explain the best way I can in relation to how I understand them in a simple manner. Lets do the food chain first, then Trups next. All businesses have a capital structure in which they survive on. Lets use public utilities as an example. An average one approximately operates on about 50% equity (stock value), 48% debt, 2 preferred stock. Usually in "the books" it is "other owners" because it technically is stock.
But cutting to the chase, it is for our purposes a "debt issue" because it trades flat in relation to par and drifts around it based on current interest rates. Remember most of these are perpetual issues, meaning "the debt never has to be repaid, just the interest (or dividend).
If a company goes into bankruptcy or liquidation here is the food chain for who gets paid first....senior bonds, subordinate bonds, Trups, preferred stock, common stock.... This is why you want to invest in preferreds in safe income from profitable strong companies...you are at the end of the line just above common stock. But common stockholders have capital gain opportunities with their risk. Preferreds have little opportunity in that since their purpose is income.




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Preferred Stock Investing-The Good , The Bad and The In Between
Old 01-09-2016, 08:30 AM   #286
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Preferred Stock Investing-The Good , The Bad and The In Between

Now the Trups question... First of all the term "Preferred stock" is a general poor descriptive term. Its like trying to identify a person by describing a person as an "American". That may be true of the person but doesnt help you much as you still don't know gender or race of the person.
This link I am posting from Schwab is an excellent one page description of preferreds and different types with a chart to help show which are preferreds and which are actually debt.
http://www.schwab.com/public/schwab/...ifferent-Risks

Now lets tackle the fancy jargon stuff of Trups... Maybe Moorebonds will read this and respond as he is a real finance guy and knows this better...
Like you a year ago, Im saying "If I cant understand what the hell those words are, it must a trap to steal my money from me".
The long story short about KCC and other Trust preferreds such as KTH, GJP, OSBCP, and AES-C is essentially this... You are essentially buying an interest in a bond from a company that is being held by a bank in a "trust". This is done for tax purposes for the issuing company. Think of it as owning shares of stock in a bond with a bank holding it as the "pass through entity". Ultimately the security of the issue you buy relies in the safety of the bond from the issuing entity.
Now, what happens if the bank goes under? Well, just for safety, I wouldn't want the bank to be a crap company, but typically (remember its held in a trust) if the bank goes under the trust is busted and then the bond that the trust was backed from is then delivered to the stockholders of the issue... Take for example my GJP issue...It is an adjustable floating rate 3rd party trust. Wells Fargo is the 3rd party trust. The preferred trust is actually backed by a bond from Dominion Resources. If something would happen to Wells Fargo, the trust is broken and now essentially you are an owner of a 5.9% senior note bond due in 2035. Now to further confuse you, GJP is actually a synthetic income issue and not a Trup, but the third party mechanics are similar.
KCC is like my KTH. KTH is essentially a bond issued by PECO energy. It also has the higher yield than the underlying bond. Trust preferrds also are different from preferreds in that they have mandatory termination dates. Personally I like this and that is why I am buying them...Why? Well if inflation ever went to sky rocket levels and never dropped, your perpetual preferreds if never called would perpetually sink... Why would you buy CNLPL with a 6.1% yield when you can get a 20% CD?
But with these Trups, at the assigned date, take KCC for example, in 2038 you get automatically your $27.68 stock price...AES-C it is 2029 etc, etc.
Now, why does it yield higher than the underlying bond? Now that is a damn good question...Many of them are like that...I am GUESSING due to the narrow difference its a tax benefit from the trust set up that is passed onto you, as you are paying the actual income tax on the issue.
But it is definitely not trickery...KCC has been paying promptly since 2001 and so has KTH. They both have investment grade ratings.
I hope this helps...I am just giving basic generalities here.
Edit...I went on a side tangent this whole time...I technically haven't been talking about Trups ( though they are very similar) which are trust preferreds but more associated with bank issued ones...Think OSBCP. Dobb/Frank Act has pretty much stopped the issuances from these since banks dont get to count them as Tier One capital anymore because they are debt and have to be repaid... Banks now have to issue non cumulative preferred stock for Tier One capital which sucks for shareholder as they just get stiffed on dividend if they cant pay it... OSBCP has to repay it because it is a Trup.. Smaller banks with older issues have been exempted and are allowed to continue using them as Tier one capital.

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Old 01-09-2016, 11:40 AM   #287
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QuantumOnline is one of the more comprehensive websites for information on TRUPs, Structured Products, Traditional & Term Preferreds, Convertibles, Mandatory Redeemable issues, and a lot more.

It is a valuable resource, and well worth a donation annually - far cheaper than a subscription to financial newsletters.

Happy to see more of our members getting interested in this area - as we retire, and capital preservation becomes more important, a stable and reliable income stream is a great anxiety reliever. We old geezers need all the sleep we can get
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Old 01-09-2016, 03:37 PM   #288
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Good questions Golden. Let me break them down in two posts and explain the best way I can in relation to how I understand them in a simple manner. Lets do the food chain first, then Trups next. All businesses have a capital structure in which they survive on. Lets use public utilities as an example. An average one approximately operates on about 50% equity (stock value), 48% debt, 2 preferred stock. Usually in "the books" it is "other owners" because it technically is stock. But cutting to the chase, it is for our purposes a "debt issue" because it trades flat in relation to par and drifts around it based on current interest rates. Remember most of these are perpetual issues, meaning "the debt never has to be repaid, just the interest (or dividend). If a company goes into bankruptcy or liquidation here is the food chain for who gets paid first....senior bonds, subordinate bonds, Trups, preferred stock, common stock.... This is why you want to invest in preferreds in safe income from profitable strong companies...you are at the end of the line just above common stock. But common stockholders have capital gain opportunities with their risk. Preferreds have little opportunity in that since their purpose is income. Sent from my iPad using Tapatalk
Thanks Mulligan. I do understand the food chain generally. My first career was as a federal bank examiner where I was employed for 10 years. As such, assessing the capital adequacy of the banks being examined was a daily activity. But I thought that in one of the comments in this string there was a reference to trust preferreds(which I now realize are referred to as trups) being more secure than regular Preferred's. Was that reference due to the fact that trups always have a maturity date?
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Preferred Stock Investing-The Good , The Bad and The In Between
Old 01-09-2016, 04:05 PM   #289
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Preferred Stock Investing-The Good , The Bad and The In Between

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Thanks Mulligan. I do understand the food chain generally. My first career was as a federal bank examiner where I was employed for 10 years. As such, assessing the capital adequacy of the banks being examined was a daily activity. But I thought that in one of the comments in this string there was a reference to trust preferreds(which I now realize are referred to as trups) being more secure than regular Preferred's. Was that reference due to the fact that trups always have a maturity date?

You may not have had a chance to see the subsequent post yet Golden. But I will keep this post clean from my babbling... Technically they are spelled TruPS. Companies issued them as a way to treat the issuing equity as being taxed as a bond but maintaining an appearance as equity on a companies balance sheet. So it is for tax and accounting purposes. Yes, personally I believe they are a bit safer because of the "end maturity date", but that isnt the reason they are safer. They are safer because ultimately your "preferred stock purchase" is backed by a bond issued from the company. It is a bond with legal ramifications if not paid. But it is the lowest of the bonds and literally one step above true preferreds. A true preferred stock is not backed by anything but a promise to pay. That is why you get the Cummulative and safe common dividend paying companies as additional protections and safe guards. Now the real "old preferreds" have even more protections. If you don't get paid in a year the preferred stock holders get to take over the board of directors. But that has never had to happen to the best of my knowledge as they always have paid.


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Old 01-09-2016, 04:14 PM   #290
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You may not have had a chance to see the subsequent post yet Golden. But I will keep this post clean from my babbling... Technically they are spelled TruPS. Companies issued them as a way to treat the issuing equity as being taxed as a bond but maintaining an appearance as equity on a companies balance sheet. So it is for tax and accounting purposes. Yes, personally I believe they are a bit safer because of the "end maturity date", but that isnt the reason they are safer. They are safer because ultimately your "preferred stock purchase" is backed by a bond issued from the company. It is a bond with legal ramifications if not paid. But it is the lowest of the bonds and literally one step above true preferreds. A true preferred stock is not backed by anything but a promise to pay. That is why you get the Cummulative and safe common dividend paying companies as additional protections and safe guards. Now the real "old preferreds" have even more protections. If you don't get paid in a year the preferred stock holders get to take over the board of directors. But that has never had to happen to the best of my knowledge as they always have paid.


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Mulligan, for the benefit of the readers of this thread, might be great if you can describe & explain the event known as " Waldenization ".

I am confident your explanation will be more way more clear than anything I could output.

Something that newcomers to the world of Preferred Investing should be aware of.

This came to mind when I read your comment that Preferred shareholders can take over the BOD. Waldenization represents the other side of the coin, where preferred shareholders are screwed by a takeover/merger/aquisition.


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Old 01-09-2016, 04:33 PM   #291
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Mulligan, for the benefit of the readers of this thread, might be great if you can describe & explain the event known as " Waldenization ".

I am confident your explanation will be more way more clear than anything I could output.

Something that newcomers to the world of Preferred Investing should be aware of.

This came to mind when I read your comment that Preferred shareholders can take over the BOD. Waldenization represents the other side of the coin, where preferred shareholders are screwed by a takeover/merger/aquisition.


Coolius

I am barely keeping my head above water explaining the basics and now you have throw me a safety ring made of lead, Coolius. From my memory a "waldenization" in the worst sense is when another company buys out another company and screws over the preferred owners leaving them with little or nothing. But this has only happened to companies that are distressed with negative net worth or very little equity due to mountains of debt. I think the best way to describe this is just to say don't buy preferreds of debt ridden or unprofitable companies....

But "waldenization" is not in and of itself a bad thing. A "waldenized" stock is also simply a bought out company that the acquiring company did not "call" the preferred stock and just left it trading and delisted it from the stock exchange. They simply didnt want to come up with the cash to buy out the preferreds.
In actuality the majority of my money is in "waldenized" stocks. CNLPL was waldenized. Northeast Utilities bought out Connecticut Light and Power and then delisted the preferreds from the exchange and they just trade on the "pink sheets". Pink sheets have a negative connotation to them but that is not factually correct. Many high quality investment grade preferreds trade on the pink sheets. I haven't checked recently but a few years ago quality foreign companies such as Nestle and Daimler traded on the pink sheets, also.


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Old 01-09-2016, 04:50 PM   #292
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I am barely keeping my head above water explaining the basics and now you have throw me a safety ring made of lead, Coolius. From my memory a "waldenization" in the worst sense is when another company buys out another company and screws over the preferred owners leaving them with little or nothing. But this has only happened to companies that are distressed with negative net worth or very little equity due to mountains of debt. I think the best way to describe this is just to say don't buy preferreds of debt ridden or unprofitable companies....

But "waldenization" is not in and of itself a bad thing. A "waldenized" stock is also simply a bought out company that the acquiring company did not "call" the preferred stock and just left it trading and delisted it from the stock exchange. They simply didnt want to come up with the cash to buy out the preferreds.
In actuality the majority of my money is in "waldenized" stocks. CNLPL was waldenized. Northeast Utilities bought out Connecticut Light and Power and then delisted the preferreds from the exchange and they just trade on the "pink sheets". Pink sheets have a negative connotation to them but that is not factually correct. Many high quality investment grade preferreds trade on the pink sheets. I haven't checked recently but a few years ago quality foreign companies such as Nestle and Daimler traded on the pink sheets, also.


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I recall that one post on this thread had someone saying he/she is nervous about " pink sheet " stocks.

Hopefully, Mulligan's explanation of why some Preferreds end up on the pink sheets will allay your concerns.

Many high quality Utility Preferreds mentioned in this thread reside on the Pink Sheets - BGLEN, BGLEI, AILLL, AILNP, CNLPL, etc.
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Old 01-09-2016, 04:59 PM   #293
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Further to Mulligan's excellent description of Waldenization, here is a quote from one of the best and most-informed individuals I have encountered on the subject of Preferred stocks, Lord Xot.



a pfd may be called in the event of a takeover due to terms in it's prospectus covering that event if not past call yet. The new owners can try to tender for them at reduced prices. They can leave them outstanding.
The worst scenario's usually involve private equity takeovers where the new owners take out cash by saddling the new companies with debt where they then fail leaving them unable to pay dividends. The pfds usually wind up on the pink sheets trading for pennies.
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Old 01-09-2016, 05:06 PM   #294
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Further to Mulligan's excellent description of Waldenization, here is a quote from one of the best and most-informed individuals I have encountered on the subject of Preferred stocks, Lord Xot.



a pfd may be called in the event of a takeover due to terms in it's prospectus covering that event if not past call yet. The new owners can try to tender for them at reduced prices. They can leave them outstanding.
The worst scenario's usually involve private equity takeovers where the new owners take out cash by saddling the new companies with debt where they then fail leaving them unable to pay dividends. The pfds usually wind up on the pink sheets trading for pennies.

Your scaring the masses Coolius! Rarely happens....and on the bright and more frequent side look at WFC-L... It survived Wachovia's collapse (WFC-L was originally a Wachovia preferred) and buyout from Wells Fargo, the 08-09 crisis and never missed a dividend....And its a non-cumulative issue also.


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Old 01-09-2016, 05:32 PM   #295
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Your scaring the masses Coolius! Rarely happens....and on the bright and more frequent side look at WFC-L... It survived Wachovia's collapse (WFC-L was originally a Wachovia preferred) and buyout from Wells Fargo, the 08-09 crisis and never missed a dividend....And its a non-cumulative issue also.


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Now you're talking - about my favorite Waldenized preferred !!

WFC-L, a diamond in the trash heap. Neglected, misunderstood and disregarded by mainstream financial media & investors. Yielding 6.4% currently, 70-100 bp above other WFC preferred issues. Non-callable. Qualified Dividends. Strong Parent.

One "negative" aspect is high price of $1,170 per share. Would cost a pretty penny to accumulate 100 shares. But a positive is that they are usually held by institutions and less likely to be dumped en masse by panicky individual investors.
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Old 01-12-2016, 07:58 AM   #296
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I bought 100 more shares of KCC at $28.68 yesterday. It took 3 partial executions to fill. About a dozen trades on the issue occurred all day with 3 of them mine and all under 100 shares...Very odd, especially after over 10,000 shares occurred Thursday, and one transaction occurred Friday, of 11 shares.
With 500 shares, that nets over $1000 a year in interest with the 7.10% plus yield.


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Old 01-12-2016, 09:59 AM   #297
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Do you guys ever just buy and hold these preferreds?
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Old 01-12-2016, 10:13 AM   #298
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Do you guys ever just buy and hold these preferreds?

Absolutely. If you review the thread, you'll notice that most of the posts are about buying & accumulating, not selling.

Thinly traded Preferreds do not trade often, so a position might have to be accumulated through many days of buying small amounts like 20,30 or 50 shares at a time.

The majority of my Preferred holdings have been accumulating since 2012. I am adding to them as opportunities arise, not selling. Obviously, I'm speaking for myself, not for others.
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Old 01-12-2016, 10:32 AM   #299
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Do you guys ever just buy and hold these preferreds?

I recently sold my one common stock at a nice profit ,had to rebuy my HSA preferreds when my HSA was closed and had to start a new HSA. Additionally, I just cash funded my 2016 HSA. Plus I had some cash sitting around as those big dividends quickly add up and allow more buying opportunities.. Most of the ones I own I will not sell. But my non core ones, if someone puts out a crazy bid, I will sell, and then rebuy with a lower bid.

My core issues of AILLL, CNLPL, KTH, AILNP, BGEPF, GJP, WFC-L and now KCC are "until death or call do us part"
My other ones AHT-D, OSBCP, MNR-A, AES-C, I am not as married to, but presently have no intention of selling

Occasionally something like this happens...I sold out my KTBA because someone was willing to pay almost $29. That brought yield down to 6%. Sell out take the non taxed cap gain and buy more KCC that was just as safe and yielded 7% plus.

There is a whole universe of preferreds from Mreits, shippers, energy, banks, BDC's, etc. But my interest level is in such a tight concentrated circle, I mostly just buy and collect more of my favorites. Its too hard to start over and reenter...


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Old 01-12-2016, 10:51 AM   #300
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Do you guys ever just buy and hold these preferreds?

Another thing to think about when buying a preferred that is more relevant than common stocks, is "buying the dividend". Each situation needs to be individually appraised at current price, but if buying it usually works better to "buy the dividend". Take my last 2 additional purchases... 1) Bought AES-C at $50 par 2days before exD. So exD, you should get the chance to buy at $49.16 at opening the next day since 84 cent dividend automatically adjusts price correct? Well you would be wrong...It opened at $49.50 and is presently trading about $49.75. If you bought yesterday at $50.01, you would have a $49.75 stock now, but 84 cents in your pocket coming the 15 th also...
2) AILLL, I bought 400 more shares at $26.20 right before exD. Its next trade after exD was $26.25 and you didnt get the 41 cent dividend either... Something to consider when purchasing...


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