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

[eta2020]

I learned one thing here preferred stocks are probably not to my taste....

I rather buy KO, PG, MO, CL, VIG, SCHD, JNJ, PM etc with dividend yield of mostly 2-3% and with a little patience in 10 years I collect 5-6% yield on my investment.

Though they look like good option for someone seeking high immediate income.

 

[MooreBonds]

I learned one thing here preferred stocks are probably not to my taste....

I rather buy KO, PG, MO, CL, VIG, SCHD, JNJ, PM etc with dividend yield of mostly 2-3% and with a little patience in 10 years I collect 5-6% yield on my investment.

Though they look like good option for someone seeking high immediate income.

I have the bulk of my portfolio in equities (85%), since I'm only 38. For my fixed income component, the majority is preferreds (7% of total portfolio) and old, higher-yielding I-bonds (5% of total portfolio), with a few other ETFs/Closed End bond funds. I stick mainly with preferreds. I don't view preferreds as a substitute for equities.

Although, as my userID implies, I will be switching to more bonds in the portfolio as I get older and FIRE.

When rates rise up higher, I will divert income from the preferreds and new cash infusions to higher yielding bonds (muni and gov't).

 

[aja8888]

I have a certain percentage of my tax deferred dividend portfolio in preferreds. I also have a couple of closed end funds that have done very well in that account also. I am in the age group where I am forced to pull RMDs from my tax deferred accounts. The preferreds, dividend stocks, and CEFs replace a fair percentage of the taxable pulls I have to do annually.

My dividend portfolio is about 20% of my tax deferred accounts. The other 80% is in a mix of Vanguard ETFs, short term bond funds, and PenFed 3% CDs.

 

[Mulligan]

I learned one thing here preferred stocks are probably not to my taste....

I rather buy KO, PG, MO, CL, VIG, SCHD, JNJ, PM etc with dividend yield of mostly 2-3% and with a little patience in 10 years I collect 5-6% yield on my investment.

Though they look like good option for someone seeking high immediate income.

They definitely should not be considered the "secret investing to riches". Your assessment of yield comparison is a sound one. Articles I have read pegging apples to apples comparisons of common to preferred is about that 10-12 year time frame.
My main reasons for investing in them are different than others who do also, or those that do not at all. Mine basically are 1) investing for high yield income at 15% instead of paying 25% income on lower yielding bonds/CDs.
2) Not a huge common stock investor, needing an illusion of security knowing in they crashed 25% tomorrow in less than 4 years I would make it up in yield while at the same time re-investing the dividends in even higher yields.
3) Security in knowing I get paid in front of common stockholders while knowing history as shown they always pay. 4) Living off a pension instead of my investments allows me to invest to fit my psychological needs, so I don't have to be as aggressive.
A typical non preferred investor such as yourself would probably only be interested in them when some "blood in street crisis" occurs. Back in 2008-09 the smart people bought in on these and made a killing. Many then 7% $25 par bank preferreds went to $7 a share and still are trading. If a person had loaded up on them you would STILL be making 25% a year income on these all while accruing a 300% plus capital gains. Even the economic unaffected electrical utilities were dragged down then. Many are still trading also and you would be collecting 10% plus a year from income and a nice 50% capital gain in your pocket.
I personally wasn't aware or paying attention at the time. But if I had been...


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[Lsbcal]

Just want to make one point here. Preferred stocks have equity characteristics so they are not a substitute for the safety of bonds, particularly in a long recession (or depression). I'm thinking of the average investor who has some AA divided between equities and bonds and cash. I would imagine the preferred's would between between equities and bonds, closer towards equities IMO.

As an illustration of this, here is a plot of a bond index fund (light green) versus a preferred stock ETF (dark green) and and preferred stock fund (orange). Note the dips in 2008-2009 with the preferred's:

 

[aja8888]

yes, they are certainly not bonds. I think Mulligan mentioned above how they took a beating in 2008-09. But, in good times, when the preferreds are higher than issue price, they can be called, like a bond.

 

[Mulligan]

Just want to make one point here. Preferred stocks have equity characteristics so they are not a substitute for the safety of bonds, particularly in a long recession (or depression). I'm thinking of the average investor who has some AA divided between equities and bonds and cash. I would imagine the preferred's would between between equities and bonds, closer towards equities IMO.

As an illustration of this, here is a plot of a bond index fund (light green) versus a preferred stock ETF (dark green) and and preferred stock fund (orange). Note the dips in 2008-2009 with the preferred's:

All good points, and the confusion of what they are is easy to understand. Vanguard treats them as equity in my "percentage of portfolio" so I am 99% equites by that standard. But if you need to call representatives about preferreds, they will immediately transfer you to the "fixed income department".
Keep in mind about LSB's chart the index crashed very hard in 08-09 because 80% of preferreds are in the financial industry and you know what happened there. If you were in preferreds outside of financials it did not take anywhere close to that fall. In fact ones I now own dropped considerably less than the stock market, and quickly recovered back to near par just a few months later.
Financial experts I have read generally are along your line of thinking recommending no more than 10% allocation.
Traditional age retirees and income investors such as myself obviously may reach for more. The trouble is "preferred stocks" have too many meanings to different people. A recent article from Ken Fisher basically stated they are a whisker away from junk bonds or junk equity and too risky to invest in. Either he has no understanding of the entire preferred market or the admin asst. opined the article. Im sorry, but I don't consider preferred stocks with investment grade ratings from Ameren or Eversource (Northeast Utilities) as anywhere close to junk and 50 plus consecutive years of dividend payments of the issues would tend to support my statement with the type I buy anyways.


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[Winemaker]

Preferreds are a hybrid form of equity shares, issued by a company to raise capital at an agreed upon rate just LIKE A BOND, however, for whatever convoluted reason, possibly to keep debt/equity ratios in balance pay their divvies from earnings/profits.
This qualifies them as a 15% or lower tax rate.


If a trust preferred, these are preferreds backed by a bond pool, that pays interest not really a dividend. These are fully taxed as interest, unless held in a tax deferred account. Banks usually issue these preferred in order to keep capital ratios in line. There has been some question as to whether idiots in Washington would consider them still as tier 1 or 2 capital but if the issues are not considered, the banks would call them at par. I have bought thousands of these shares from various banks at below par and have collected 6+% interest divvies. I don't care if they are called at $25, some issues I paid less than $20.00.


Most concerns I have seen posted are the fact that their value fell during the Great Recession. EVERY ASSET CLASS fell during that time period because no one knew what is or was going on. Pension funds, banks, endowments, insurance companies, charities, hedge funds, and any other type of investor took advantage of obvious facts that a visually impaired person could see ( banks were forced to make mortgages that were to people who couldn't afford them) and bought an speculative hedge (credit default swap) that had too many people sitting on the right (wrong) side of the hedge which as everyone knows turned out pretty $hitty. All investment classes were hit.


I don't understand the thought process that if rates rise, my preferred that I bought for $22.73 that is paying me 6.45% quarterly on par value $25, is going to fall in market value that is now $25.45. It can fall a buck and see if I care. I'm collecting the 6.45% divvie til 2045 unless it goes belly up.


Despite their possible change in value, all my preferred paid their divvies at the fixed rate they agreed to pay, on schedule, and on time, except for the two issues I bought for speculation and not as FIXED INCOME investments.


I am not selling you snake oil, just informing those on this forum of my past experiences with preferreds.

 

[Lsbcal]

Winemaker, take a look at the chart I posted. The index bond fund (VBMFX, total bond mkt) was pretty stable during the 2008-2009 decline. Treasuries were actually up, one could have been in VFITX (intermediate Treasuries) and done well.

Also, suppose things had gotten worse like in the 1930's. Then being in any kind of equity class would have had a much worse outcome. We have to remember that when the economy is heading south, fear is prevalent and one wants to have some of their assets in relatively safe bonds.

Should we have another decline, my plan is to move my bond funds into Treasuries. Has worked in all postwar recessions that I've got data for.

 

[Winemaker]

Thanks for bringing that to my attention but was the reason for the stability the fact that when the majority of folks sold out of their falling investments and supply/demand of Treasuries kept pace with the decline? And call me a kook wearing a tin foil hat, but I do not own any Treasuries of any kind unless one of my equity funds or my stable value fund has some. Some day the Treasury is going to run out of other peoples money to buy ink, paper, computers and whatever they need to print Treasuries.




As far as bonds are concerned, I purchased a gang of corporate bonds well, well below par during that time period so I can't explain the bond index being stable. Caterpillar, Humana, General Electric to name a few.

 

[eytonxav]

Here is an article that explains the dangers and benefits of preferred's pretty well. I think as Mulligan has pointed out, if you decide on individual preferreds, do your homework to understand what you are buying.

Why you should avoid preferred stocks - CBS News

 

[aja8888]

Here is an article that explains the dangers and benefits of preferred's pretty well. I think as Mulligan has pointed out, if you decide on individual preferreds, do your homework to understand what you are buying.

Why you should avoid preferred stocks - CBS News

Great article. Thanks.

If you are going to buy these stocks, one must pick carefully. I picked up a small position in offerings by U.S. based CHS (CHSCM), a well-run global agricultural cooperative:

Why You Should Prefer Preferreds - Forbes

 

[Totoro]

A big learning for me here is that when a combination of several factors comes together for the small investor, it can be great:

• Item is callable at any time (either bonds or preferreds)
• Issued by stable companies (like utilities)
• Relatively high interest rates (typically older issues)
• Long maturities (even "infinite"?)
• .. and also: a small portion of the total market

All these mean a relatively sure thing. The fact that the market is niche and callable at any time mean there's a natural upper limit on price.



From a company perspective since this type of debt is junior to regular bonds actually calling them is a bit of a hassle, and marginal in their total financing anyway. So unless the rates diverge very much, it's not really worth calling.



Just need to find ones around par (as mentioned here). Not sure how I would go about finding euro denoted ones though (+non-financial)

 

[Mulligan]

Totoro you need a European version of Quantumonline if there is one. I have no familiarity in that realm though. I know some European banks such as RBS and Lloyds have them but they are in the US market though. The ones that I found to be my liking I would enter common stock ticker symbol into Quantumonline. Then I would hit related securities under company. There is would pop out the whole list and I would read and compare them.


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[Winemaker]

Check out www.dividendyieldbusters.com/preferred-stocks-trading-under-par. There are numerous stocks given as well as various income portfolios using preferreds as well as last years model portfolio . You can just get an idea of how to use preferreds to your advantage.


I didn't see any great boogiemen that were not already discussed about preferreds in that CBS article.


Mulligan and I have had several conversations on the side about preferreds and he warned me about forum members having great fear of these investments. I believe Buffett has said (paraphrasing)" Buy when others are fearful and sell when others are greedy".

 

[eta2020]

Mulligan and I have had several conversations on the side about preferreds and he warned me about forum members having great fear of these investments. I believe Buffett has said (paraphrasing)" Buy when others are fearful and sell when others are greedy".

It looks to me like a pretty viable option for somebody seeking high immediate income.

I would consider 5-10% of my money in preferreds.....

But on long run high growth of dividend is much more attractive to me. So this is where I would put 50% plus of my money. I like delayed gratification

 

[Mulligan]

Great article. Thanks.

If you are going to buy these stocks, one must pick carefully. I picked up a small position in offerings by U.S. based CHS (CHSCM), a well-run global agricultural cooperative:

Why You Should Prefer Preferreds - Forbes

I believe negative articles like DFW's link (which I have read before) are good for new investors to read just to make one pause and reflect on why you would own them. But it really isnt a fair article as it wants to project the bad points of them in relation to stocks/bonds in the opposite way. And they always want to bring up bankruptcy. I ain't buying the type that are in danger of bankruptcy. Im sure the writer is the type who would recommend a utility stock such as Eversource and then write this article. Uhm, hello they offer preferreds too, so they are dangerous? And the tax issue only helps corporates? Crazy...It slashes my tax bill 40% investing in them instead of bonds. Besides if they truly were pitiful investments why would a corporation invest in them. So they can save 30% on interest income to lose 100% of invested capital? Ya, Im thinking thats why they do it.
The scare tactics of not paying dividends are a little overblown with the higher quality companies. They do not emphasize that a company cannot pay one penny in dividends until preferreds are paid first. They make it sound like they can say "screw the preferred holders and lets not pay them this time". Even when BoA almost went under and cut the dividend to one cent, they never missed a preferred payment. I wont even invest in that train wreck of a company and they still paid their preferreds.
If a person is an income orientated investor and wont panic on a price drop these are good values. I don't see 6.25% CDs or treasuries on the horizon.
A total return investor doesn't have a real incentive for these issues though I believe.
Though I have some CHSCL, it and CHSCM are dropping a bit and it they can slide a bit more, I am going back in!


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[Winemaker]

It looks to me like a pretty viable option for somebody seeking high immediate income.

I would consider 5-10% of my money in preferreds.....

But on long run high growth of dividend is much more attractive to me. So this is where I would put 50% plus of my money. I like delayed gratification

I also have 50%+ of my money in dividend stocks, 20-30% individual corporate bonds and preferreds, and ~20% in cash and other. I own NO bond funds of any kind.

 

[Mulligan]

Since we reached halfway point of the year, I thought I would update preferred stock performances. Since prices are sensitive to market interest rates I will note the 10 year and 30 year are both up 47 and 42 basis points since Jan. 1. Out of my 6 biggest issues 3 are up and 3 are down (Though one that is up CSHCL shouldn't count since I got in on pre-trading mid January and CHS left too much meat on that bone).
Just to give an idea on how they are moving for those that were interested I will post them with Jan. 2 date and todays price second.
CNLPL (Conn. Light & Power) $52.75 (6.14%) 52.25 (6.2%)
AILLL (Ameren) $25.85 (6.4%) $25.66 (6.45%)
BGE-B (Balt. Gas & Elec) $25.44 (6.09%) $25.40 (6.1%)
CHSCL $25.15 (7.46%) $27.04 (6.93%)
OSBCP (Old Second Bank) $9.97 (7.82%) $10.04 (7.77%)
ARCPP (American Reality Corp) $22.84 (7.33%) $24.01 (6.97%)
Been some recent downside bias but since 2 high yield dividends have already been captured they are all solidly in the black for the year. But investing in these is about the income. But as noted before people worried about stock movement or total return will not find these appealing at all.


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[Golden sunsets]

Thanks for posting Mulligan. Those yields look mighty attractive. I tried your method of placing a limit order on an issue from my local public utility. I waited until just after the x dividend date and placed an order for par minus the divvy, but unfortunately, the issue is extremely thinly traded. The yield is 6%, but the call date has expired and the company (Iberdola) will have to pay up by 10% if they want to call it, an attractive feature that I think makes the desire to sell unlikely by all but those who "need to sell". I would bet that the entire issue is held all by some institution. I couldn't find any recent activity. Oh well. I thought that would be a good first start as I know the utility and can keep track of their health through local reports in the news.

 

[Mulligan]

Thanks for posting Mulligan. Those yields look mighty attractive. I tried your method of placing a limit order on an issue from my local public utility. I waited until just after the x dividend date and placed an order for par minus the divvy, but unfortunately, the issue is extremely thinly traded. The yield is 6%, but the call date has expired and the company (Iberdola) will have to pay up by 10% if they want to call it, an attractive feature that I think makes the desire to sell unlikely by all but those who "need to sell". I would bet that the entire issue is held all by some institution. I couldn't find any recent activity. Oh well. I thought that would be a good first start as I know the utility and can keep track of their health through local reports in the news.

You wouldn't happen to be trying to buy CTPPO out of Maine are you Golden? It actually was called several years ago but a volunteer call. Looks like about 2,000 shares left. If that is the issue it probably will not trade. Why do I know? Because I tried also to get it too before and gave up.
I would suggest looking at dabbling into CNLPL, CNTHP, AILLL, or BGE-B. Though BGE-B is taxed interest like a CD if that matters. I stick with the transmission and distribution only Utes that don't have to sell power and receive a guaranteed ROE.


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[Golden sunsets]

You wouldn't happen to be trying to buy CTPPO out of Maine are you Golden? It actually was called several years ago but a volunteer call. Looks like about 2,000 shares left. If that is the issue it probably will not trade. Why do I know? Because I tried also to get it too before and gave up.
I would suggest looking at dabbling into CNLPL, CNTHP, AILLL, or BGE-B. Though BGE-B is taxed interest like a CD if that matters. I stick with the transmission and distribution only Utes that don't have to sell power and receive a guaranteed ROE.


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Yep. That's the one. Your info makes sense. I didn't understand why there were only 2,000 outstanding shares. It didn't seem worth it to have put out such a small issue. I mean Maine is a small state, but 200,000 - didn't make sense. Now I understand.

 

[Golden sunsets]

You wouldn't happen to be trying to buy CTPPO out of Maine are you Golden? It actually was called several years ago but a volunteer call. Looks like about 2,000 shares left. If that is the issue it probably will not trade. Why do I know? Because I tried also to get it too before and gave up.
I would suggest looking at dabbling into CNLPL, CNTHP, AILLL, or BGE-B. Though BGE-B is taxed interest like a CD if that matters. I stick with the transmission and distribution only Utes that don't have to sell power and receive a guaranteed ROE.


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I'll admit to a great deal of ignorance on utilities. Is CMP (Iberdola) a utility that transmits and distributes only?

 

[Mulligan]

Yep. That's the one. Your info makes sense. I didn't understand why there were only 2,000 outstanding shares. It didn't seem worth it to have put out such a small issue. I mean Maine is a small state, but 200,000 - didn't make sense. Now I understand.

There originally were 4,000 shares issued but it was a long ago offering of $400,000 back when you could actually build something with that kind of money. They had a voluntary call offering of $110 a share several years ago, but had a deadline with it. The ask price is $175 so that really means none are for sale. The only reason why I know all this is because I was trying to figure out why I couldn't get any and why it wasn't trading. You are definitely correct, the rest are buried and forgotten but the automatic dividend payments live on.


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[Mulligan]

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

I'll admit to a great deal of ignorance on utilities. Is CMP (Iberdola) a utility that transmits and distributes only?

Yes CMP is only T&D since 2000. Its parent company is a tangled web of all things power throughout the world though. Many Utes are running toward that model again to escape dangers of the unregulated power generation market. T&D Utes get rates based on costs to repair and distribute the power and are guaranteed a return on equity. The Feds have initiated a new program that allows them a 2-3% above state rates if they are plowing money back into upgrading systems. Many are taking advantage of that thus increasing the safety of dividends even more. Though that is being done for the benefit of the common stock as they can then increase dividend. Preferreds do not need that though as dividend is fixed and they get paid before the common holders get theirs. But anything that increases safety of my payment, I like!


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