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

[pb4uski]

I got emails from Fidelity this morning indicating that both BNY Mellon (CUSIP064058209 BANK NEW YORK MELLON CORP DP1/4000 PFD-C) and Wells Fargo (CUSIP 949746366 WELLS FARGO CO NEW DEP SHS 1/1000 T) preferred stock are being called.

Ugh!

 

[bobandsherry]

I'm not surprised, actually more surprised that more haven't called and done a reissue to lock on lower rates.

 

[Happyras]

I got emails from Fidelity this morning indicating that both BNY Mellon (CUSIP064058209 BANK NEW YORK MELLON CORP DP1/4000 PFD-C) and Wells Fargo (CUSIP 949746366 WELLS FARGO CO NEW DEP SHS 1/1000 T) preferred stock are being called.

Ugh!

+1, but only T and V shares. The 5% WF dividend shares not yet...I am hoping my NGHco and cp shares are not called until the buyout is done.

 

[Happyras]

So, I am trying to learn, the hard way, on how to benefit from preferred investing. It has occurred to me that I do not have the full set of tools to really evaluate risk for yield. In the case of Wells Fargo T depository shares, I thought I would have a better net yield.

I bought 1000 at 25.58/share, and a forward dividend of $0.375, yet callable. I may have over estimated the yield to worst case. Buying in June, I got the dividend in Sept. Now in Nov it is called for Dec with ex div end of Nov. Those in the know seemed to drive the price down prior to the call announcement. How do I get in the "know"? I suspect there is insider knowledge on the call announcement.

Today, realizing I am getting no more out of this, I sold at par plus the pending dividend. Actually, I got $0.005 more than par plus dividend. So what did I miss? Do insiders know of a special dividend to be issued, or why would anyone buy my shares now for more than par plus the distribution?

Doing the math, over 5 months my in/out yield was a paltry 1.6% (annualized) for a significant amount of risk. I could have gotten that in a CD with minimal risk. So back to my question, what tools am I missing to evaluate such investments? I do have a lot in PFF and PGX, both bought around June and both up significantly compared to my Wells Fargo trial. This leads me to wonder what I need to learn to do better.....I believe I am going to do better on the NGH shares, but then it does make me more concerned I missed something there as well.

 

[pb4uski]

From what you wrote I get an XIRR of 5.20%... not sure of your purchase date so I used June 7.

	5.20%
06/07/20	-25.580
06/15/20	0.375
09/15/20	0.375
11/10/20	25.380

Funny thing... I just sold my WFCPRT position for $25.37... the buyer will receive $25.375 on Dec 15.

Similarly, I just sold BKPRC which is being called for $25.36... the buyer will receive $25.325 on Dec 20.

I've seen this happen many times with called preferreds... two questions... why would I wait and what is the buyer's thinking?

 

[Happyras]

From what you wrote I get an XIRR of 5.64%... not sure of your purchase date so I used June 7.

	5.20%
06/07/20	-25.580
06/15/20	0.375
09/15/20	0.375
11/10/20	25.380

Funny thing... I just sold my position for $25.37... the buyer will receive $25.375 on Dec 15.

Similarly, I just sold BKPRC which is being called for $25.36... the buyer will receive $25.325 on Dec 20.

I've seen this happen many times with called preferreds... two questions... why would I wait and what is the buyer's thinking?

Thanks good to know others doing the same. Have no clue why people pay more after the call...

The math is a little different. I bought on June 23, so I MISSED the June dividend, which is $375 less in gain than your calc. My total gain is $174 not $549, so my XIRR is closer to the 1.6% due to this miss.

I was thinking of buying more MNRPC (edit actually I just did), it is not called until Sept 2021, and it is trading just a few pennies over par. Its more than I paid a few months ago, but has such a strong dividend! What do you think? Ex Div is 11/13 2 days away pays $0.3828

 

[pb4uski]

Ah... I misread... thought you received the June dividend.

I like AGO.PRB... 6.22% yield and S&P A and Moody's Baa2. Callable now but they have been callable since 2006 and they still haven't called them yet so I'm taking a chance on the call risk.

 

[pb4uski]

Question: Does anyone know a source of yield-to-call information for preferreds?

I'm getting tired of doing Excel XIRR calculations by hand.

 

[Coolius]

MNR-C has not finished over $25 for about 2 months. When I read HappyRas's post, had to confirm for myself, and indeed it did close today at $25.09.


A pleasant surprise.


I hold a reasonable amount, average cost basis $24.95. Fully expecting it to be called at first opportunity ( Sept 15, 2021 ).

 

[Sunset]

...
I was thinking of buying more MNRPC (edit actually I just did), it is not called until Sept 2021, and it is trading just a few pennies over par. Its more than I paid a few months ago, but has such a strong dividend! What do you think? Ex Div is 11/13 2 days away pays $0.3828

If I buy this 11/12 , which means it does not actually get settled for 2->3 days, does this mean I would get the dividend, or not

 

[Texas Proud]

Just did a quick google.. maybe this is what you want?


https://www.preferred-stock.com/calculator_ytc.php




Or possibly this?


https://dqydj.com/bond-yield-to-worst-calculator/

 

[Coolius]

Sunset, as long as you buy shares up to the day before XD ( and hold it through the day ), you get the dividend.


So if you buy on 11/12 ( tomorrow ), yes, you receive the dividend.


Bear in mind that the Share Price will adjust down to reflect XD when trading opens on 11/13.



After that, normal ups & downs of the market will prevail, so there's no telling if share price ends above or below the previous day's close.

 

[Mulligan]

MNR-C has not finished over $25 for about 2 months. When I read HappyRas's post, had to confirm for myself, and indeed it did close today at $25.09.


A pleasant surprise.


I hold a reasonable amount, average cost basis $24.95. Fully expecting it to be called at first opportunity ( Sept 15, 2021 ).

With few opportunities, I bought about 600 of MNR-C at $24.88 a week or so ago, figuring it will trickle north approaching exD. I suspect the reason this issue stays just under par most of the time is MNR uses this as an ATM all the time. This company definitely caters to high quality IG tenants mostly Fed Ex though.

 

[pb4uski]

Learned something new today.

I wanted to buy some RZB and Fidelity would not allow me to buy it online so I had to call in. From what the helpful guy at the fixed income trading desk said, it seems that to protect me that Fido doesn't allow online trades for any fixed-to-floating rate preferreds, even though the floating rate of 3-month LIBOR + 4.04% doesn't bite until June 2026 and the issue is rated BBB+ by S&P.

As part of the conversation I asked him if they had any useful screener tools for preferred stocks and baby bonds beyond the preferred stock screener. He said no and added that baby bonds were also on the list of things that I would have to call in on... though I was able to buy all the AGOPRB that I wanted so I'm skeptical on the baby bond thing.

 

[bobandsherry]

Learned something new today.

I wanted to buy some RZB and Fidelity would not allow me to buy it online so I had to call in. From what the helpful guy at the fixed income trading desk said, it seems that to protect me that Fido doesn't allow online trades for any fixed-to-floating rate preferreds, even though the floating rate of 3-month LIBOR + 4.04% doesn't bite until June 2026 and the issue is rated BBB+ by S&P.

As part of the conversation I asked him if they had any useful screener tools for preferred stocks and baby bonds beyond the preferred stock screener. He said no and added that baby bonds were also on the list of things that I would have to call in on... though I was able to buy all the AGOPRB that I wanted so I'm skeptical on the baby bond thing.

Yeah, I find Fidelity wants to protect me from myself way too often. Fortunately, E-Trade gives me credit as being smart enough to know what I want to do and doesn't put in some obstacles to buying what I want. After having both, I find I just prefer E-Trade over Fido so have most of my "fun" money sitting there vs. Fido.

 

[pb4uski]

Yeah... and I'm guessing that Vanguard would likely be even more restrictive than Fido.

 

[pb4uski]

Question: Does anyone know a source of yield-to-call information for preferreds?

I'm getting tired of doing Excel XIRR calculations by hand.

Just did a quick google.. maybe this is what you want?


https://www.preferred-stock.com/calculator_ytc.php




Or possibly this?


https://dqydj.com/bond-yield-to-worst-calculator/

While I was hoping to find a source where Y-T-C was already calculated and displayed for a particular ticker, I ended up designing an Excel worksheet based on the links that TP suggested... I input the purchase date, call date, coupon, frequency, purchase price and call price/par.... and then calculate the yield-to-call using Excel's RATE function. With a spreadsheet I can save the calculation for future reference.

I compared it to XIRR for a few issues and it is pretty close.... really close if the term is more than a few years but less close if the term is short... but plenty good for my purposes.

 

[bobandsherry]

While I was hoping to find a source where Y-T-C was already calculated and displayed for a particular ticker, I ended up designing an Excel worksheet based on the links that TP suggested... I input the purchase date, call date, coupon, frequency, purchase price and call price/par.... and then calculate the yield-to-call using Excel's RATE function. With a spreadsheet I can save the calculation for future reference.

I compared it to XIRR for a few issues and it is pretty close.... really close if the term is more than a few years but less close if the term is short... but plenty good for my purposes.

XIRR always returns an annualized compound rate, so could be why you are getting different result for short term. RATE returns periodic returns. IRR is also useful, it returns periodic return as well.

RATE is probably best since cash flows would all be the same and with regular intervals. IRR is when cash flows vary but under regular intervals. And XIRR is useful when cash flows and intervals both are varied.

 

[pb4uski]

Yes, I later realized that XIRR gives me a compounded return and I had to modify the YTC formula to reflect compounding by using =((1+RATE)^n)-1.... and that gave me a result that was the same as XIRR in a test where all the periods are aligned.

So if I had a 10% bond as an example, if it paid semi-annually the APY is really 10.25% [(1+10%/2)^2]-1, as is the same as the XIRR.

As a practical matter, there is still a diference because the first period is less than 3 months until the next dividend but the RATE calculation actually understates the result compared to XIRR so I'm ok with using easier RATE calculation for decision making.

 

[Green_and_Gold]

YTC tool

I use this tool:
https://gpi.fidelity.com/ftgw/interfaces/pyc/
A couple of notes:
- May not work if logged to your Fido account. I either log out or use a different browser.
- Fill in all info and run it twice. After first run, note the "Accrued Interest" amount. Subtract the "Accrued Interest" amount from "Purchase Price" and run again. The "Invoice Price" should now be equal to intended purchase price and the right YTC should be displayed.

Best regards, No. 12

 

[53anddone]

I think you want to be careful with simply looking at yield to call as what will happen is it will drive you toward more lower quality preferreds. For example you can buy a preferred at $21 today that will show a very nice yield to call but there is a reason its $21. Conversely if you look at very high quality preferreds (think JPM) they are going to be well above par and thus the YTC is going to be like a CD (or worse). Low quality and you risk default or suspension of dividends so you need to do your homework.

I tend to buy preferreds as CD replacements and aim to buy below par and then just hold to the call. (This also has its risks because if rates go up it may never be called or the price may become depressed and then you are stuck with something which is paying below market, but that's another story.) Others buy and trade them like stocks which is also fine I suppose but given the illiquid nature of preferreds I leave that to the pros.

For someone who is new to preferred investing here are the basic elements I would look at before buying:

1. Quality - Are they investment grade? Most of the Banks and large Utilities are, but rates will also be lower in return for this safety.
2. Are dividends cumulative if the company decides to halt them? Not that important if the stock is IG, more important if not.
3. Are the dividends qualified for tax purposes? i.e MNR/C is not a qualified dividend nor are any issued by REITs. Banks are generally qualified.
4. Current yield and YTC. Already discussed....
5. Liquidity (ease of buying and selling). This can become an issue if rates start to rise and you see the price of your preferred dropping......

My two cents - right now high quality preferred stocks are expensive but you can still beat a CD pretty easily in a quality issuance.

Good luck.

 

[pb4uski]

I think you want to be careful with simply looking at yield to call...

I don't think that I ever said that. I am interested in Y-T-C simply because I have had a number of preferreds called over the last year or so and don't want to get stuck with a loser.

More than 75% of my tickers are investment grade and 93% are BB or better with only 7% not rated.

If you aim to buy preferreds below par you must not be buying much these days.

 

[pb4uski]

I use this tool:
https://gpi.fidelity.com/ftgw/interfaces/pyc/
A couple of notes:
- May not work if logged to your Fido account. I either log out or use a different browser.
- Fill in all info and run it twice. After first run, note the "Accrued Interest" amount. Subtract the "Accrued Interest" amount from "Purchase Price" and run again. The "Invoice Price" should now be equal to intended purchase price and the right YTC should be displayed.

Best regards, No. 12

That's the best one that I have seen so far.

Now if I could only find one where I input the preferred stock ticker symbol and all the other fields are populated automatically!

And I like the idea of adjusting the purchase price for accrued interest as it better aligns the RATE based yield calculation with the XIRR so I've added that to my model.

Thanks from a fellow TB12 fan.

 

[53anddone]

I don't think that I ever said that. I am interested in Y-T-C simply because I have had a number of preferreds called over the last year or so and don't want to get stuck with a loser.



More than 75% of my tickers are investment grade and 93% are BB or better with only 7% not rated.



If you aim to buy preferreds below par you must not be buying much these days.

Nope, mostly on the sidelines at the moment.

 

[pb4uski]

Shazam! I've been using the Fidelity preferred stock screener and for sh!ts and giggles figured that I'd see what Vanguard offered... I found that their screener include YTW!

https://personal.vanguard.com/us/StocksScreenerSec