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

[Slow But Steady]

I mentioned a week or so ago that I sold EYMXP at $27, after waiting around a couple weeks with an open order. I replaced that with AILLL at $26.81.

Today I also picked up a few CVB at $10.83.

I was busy at work the day the of the announcement that PVTB was being sold, so I wasn't able to get out of PVTBP like Mulligan and others. By the time I saw the notice, the price was too low to bother selling. I may buy more if the price heads down again. (I paid $26.59 for the first batch, so I may come out OK depending how long it takes them to call it.)

Only 5 more days of work for me. After that, I'll be able to check the markets before getting on with the rest of my day.

[Mulligan]

Quote:

Originally Posted by Slow But Steady I mentioned a week or so ago that I sold EYMXP at $27, after waiting around a couple weeks with an open order. I replaced that with AILLL at $26.81. Today I also picked up a few CVB at $10.83. I was busy at work the day the of the announcement that PVTB was being sold, so I wasn't able to get out of PVTBP like Mulligan and others. By the time I saw the notice, the price was too low to bother selling. I may buy more if the price heads down again. (I paid $26.59 for the first batch, so I may come out OK depending how long it takes them to call it.) Only 5 more days of work for me. After that, I'll be able to check the markets before getting on with the rest of my day.

Good decision just to hang on. There is no certainty the issue will even be called. At this point it appears best to hang on. I only got lucky because Coolius is in charge of waking up the Roosters in his area so he knew and passed info on to me. Then it was just luck at opening my sell order got in before others. But this was the first time I ever sold something and then bought even more than I owned of it the same day.
I like CVB and have owned it... But when BGLEN went on fire sale, I dumped every stray non core issue that was a winner and sold to get those 800 shares. Then when I sold those this week I used that money and quick profits to double down more on PVTBP. If any of my TRUPs get called, I will look to get back in CVB.


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[makd]

Question: WFC-L is non-cumulative.

Should one care?

Is the idea that for them not to pay that things would have to be very bad and if they suspended that would be a reputational issue?

Just buy it and at the first sign of any issue with WFC, sell?

[Mulligan]

Quote:

Originally Posted by makd Question: WFC-L is non-cumulative. Should one care? Is the idea that for them not to pay that things would have to be very bad and if they suspended that would be a reputational issue? Just buy it and at the first sign of any issue with WFC, sell?

Makd, I do not own nor will I buy non cumulative preferreds. BUT.... With WFC or pretty much any bank it is largely immaterial I will admit. Due to Dobb Frank Banking Act, banks BY LAW must issue non cumulative preferreds. They are the new near mandatory issues and life blood for Tier 1 capital regulations determined by law for the big banks.. They will not screw you over unless its of dire emergency, as they want people to buy these as they need the capital.
Basically the Feds got ticked off during the bailout they had to cover all the trust preferred stock as it was technically debt not stock. So they banned the use of them and grandfathered trust preferred old issues for smaller banks. They dont want to bail the bonds out if things ever go to hell again. They want the preferred stock holders to eat it instead. But banks have more stringent requirements so that risk is greatly minimized now.
So I wouldnt worry, until they start slashing common stock divi greatly.



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[Coolius]

Quote:

Originally Posted by makd Question: WFC-L is non-cumulative. Should one care? Is the idea that for them not to pay that things would have to be very bad and if they suspended that would be a reputational issue? Just buy it and at the first sign of any issue with WFC, sell?

The dividends on the Preferred issues cannot be suspended unless common dividend has been cut to zero.

So, with preferred stock you do have a early warning indicator. If a company starts slashing the common dividend, then yes, the risk of suspension on preferreds will go up, and you might want to exit at that time.

But, as Mulligan says, this would be an action close to their last resort - and WFC is one of the strongest banks around. So i would not be overly concerned.

Disclosure: I own WFC-L

[Mulligan]

Quote:

Originally Posted by Coolius The dividends on the Preferred issues cannot be suspended unless common dividend has been cut to zero. So, with preferred stock you do have a early warning indicator. If a company starts slashing the common dividend, then yes, the risk of suspension on preferreds will go up, and you might want to exit at that time. But, as Mulligan says, this would be an action close to their last resort - and WFC is one of the strongest banks around. So i would not be overly concerned. Disclosure: I own WFC-L

And even for most banks, they still managed to pay the preferreds even during the 08-09 crisis. In fact WFC-L was borne out of the crisis. Wells Fargo took over troubled Wachovia during this time and converted this preferred to theirs as originally it was a Wachovia issue. Since they are paying the par 7.5% yield (or something close to that off memory) they would love to be rid of it but cant.


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[makd]

Thanks, Gents!

[Mulligan]

Here is some food for thought...If one thinks buying 5.5% preferreds is a tough pill to swallow. Consider this...Yes treasury rates are at all time lows...BUT...High quality preferred stocks are no where near their all time lows. They could go considerably lower yet. There are dozens of these investment grade issues still trading today. Look at these initial par yields at issue for example... CTWSO 4%, CNLTL 3.8%, WELPP 3.6%, UEPEN 3.5%, IPWLP 4%. So yes it can get considerably lower.


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[Mulligan]

Digging into an SEC filing released today concerning PVTBP, I found this.

6.17 Company Debt. Parent will execute and deliver, or cause to be executed and delivered, by or on behalf of Holdco, at or prior to the Effective Time, any supplements, amendments or other instruments required for the due assumption of Company’s outstanding fixed and floating rate Junior Subordinated Debentures due 2034, 2035 and 2068 and 7.125% Subordinated Debentures due 2042 (collectively, the “Company Debentures”) and (to the extent informed of such requirement by the Company) other agreements to the extent required by the terms of the Company Debentures.

The 2068 debenture is PVTBP "trust preferred". Although I am not versed in such matters to fully understand full intent let alone action, I took this as a sign that the Canadian Bank acquiring will assume this and all debt.
So I am taking this as a sign they will have them until merger and maybe longer. I bought 200 more today so I own 1300 shares now...I will consider this a good trade ultimately under 3 separate scenarios that may occur. 1) Hold until call and take cap loss but capture 3 divis 2) Hold and no call and potentially earn 9.5% every year outstanding. 3) with next divi or 2 declaration and let the "yield hog idiots" bid it back up once they notice issue isnt being called immediately and sell them off. I am fine going any of the 3 directions.


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[Running_Man]

Quote:

Originally Posted by makd Question: WFC-L is non-cumulative. Should one care? Is the idea that for them not to pay that things would have to be very bad and if they suspended that would be a reputational issue? Just buy it and at the first sign of any issue with WFC, sell?

I would think you should keep this in mind, in general it is a bad characteristic of a preferred issue as without the dividend there is little to no value. In 2008/9 crisis this issue fell to 298! It is likely if one is fond of WFC and didn’t think it would fold that this was a good issue to hold. Yet it fell 70%. At that point you would have had a 25% yield which was even better than the preferred deals that Warren Buffet was getting from banks, indeed he had his called away that payed 10 percent while this one continues to live on. So the non-cumulative risk is very much offset by the non-calling risk. Even a 2009 purchase at $500 after the bank rules were changed for recording losses would have returned more in dividends than the purchase price.

I would not bet my retirement on it but I would be willing to hold 2-3 percent of my portfolio in it without worry at this point, which is the same limit I use on buying individual stocks.

[Mulligan]

Quote:

Originally Posted by Running_Man I would think you should keep this in mind, in general it is a bad characteristic of a preferred issue as without the dividend there is little to no value. In 2008/9 crisis this issue fell to 298! It is likely if one is fond of WFC and didn’t think it would fold that this was a good issue to hold. Yet it fell 70%. At that point you would have had a 25% yield which was even better than the preferred deals that Warren Buffet was getting from banks, indeed he had his called away that payed 10 percent while this one continues to live on. So the non-cumulative risk is very much offset by the non-calling risk. Even a 2009 purchase at $500 after the bank rules were changed for recording losses would have returned more in dividends than the purchase price. I would not bet my retirement on it but I would be willing to hold 2-3 percent of my portfolio in it without worry at this point, which is the same limit I use on buying individual stocks.

Before Wachovia merged with Wells it got down to $200. Ouch! That is why I stick mostly with regulated utilities. I can get higher yield from safe regulated utilities than I can with safe bank non cum preferreds. And their history of price action is a fraction of volatility that the banks have had in bad times. Besides, I do not know what is in their loans.
And yes, I am talking out of both sides of my mouth buying bank trust preferreds, but yields are considerably higher and they are on the debt side of the ledger not stock side, so I like the relative risk/reward.
If I were managing a true personal portfolio, I would hope I had the discipline to follow your most prudent 2-3% individual allocation....Very wise, but since I am well covered with my pension, I "load up" on individual issues. I am definitely stretching my comfort zone with PVTBP, but not losing sleep due to the unique events around it. It wont be talked about in 2-3 years tops so it doesn't have the legs left to be a true perpetual.


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[makd]

Quote:

Originally Posted by Running_Man I would think you should keep this in mind, in general it is a bad characteristic of a preferred issue as without the dividend there is little to no value. In 2008/9 crisis this issue fell to 298! It is likely if one is fond of WFC and didn’t think it would fold that this was a good issue to hold. Yet it fell 70%. At that point you would have had a 25% yield which was even better than the preferred deals that Warren Buffet was getting from banks, indeed he had his called away that payed 10 percent while this one continues to live on. So the non-cumulative risk is very much offset by the non-calling risk. Even a 2009 purchase at $500 after the bank rules were changed for recording losses would have returned more in dividends than the purchase price. I would not bet my retirement on it but I would be willing to hold 2-3 percent of my portfolio in it without worry at this point, which is the same limit I use on buying individual stocks.

Thanks, I appreciate your thoughts. The 2-3% sounds wise. The fluctuation in value is concerning. I've been a WFB customer since I was 16 or so and I have always thought they were a well run operation but I'm sure people thought that about Lehman too.

On WFC-L, specifically, it's nuts that you see a fluctuation in value in a few days equal to the dividend payment. I see the same thing in some of the dividend commons that I own. I suppose that some of the risk of buying at the wrong time can be mitigated by buying when something has been down for a while?

[Mulligan]

Quote:

Originally Posted by makd Thanks, I appreciate your thoughts. The 2-3% sounds wise. The fluctuation in value is concerning. I've been a WFB customer since I was 16 or so and I have always thought they were a well run operation but I'm sure people thought that about Lehman too. On WFC-L, specifically, it's nuts that you see a fluctuation in value in a few days equal to the dividend payment. I see the same thing in some of the dividend commons that I own. I suppose that some of the risk of buying at the wrong time can be mitigated by buying when something has been down for a while?

Well its hard to tell, as anything of any reasonable quality that is not past call is through the roof. I dont like to buy when things are at a premium. Of course if rates stay at this point and people keep climbing in , they can also go higher... That is why I focus most of my money on past call above market rate yielding preferreds. From companies that should call them but have no expressed concern to do so. If AILLL or BGLEN, or PVTBP werent past call, they would be considerably higher than what they are. Call risk keeps them anchored closer to par. I will take the call risk of an above market payer over a lower yielding issue not callable. I have some money in lower yielders just for a bit of balance, but no way would I PILE into "heavily bought not callable lower yielders".
Now I took as much Connecticut Water as I could get, for diversity reasons, but it is the only water utility preferred left and its safety is unquestionably rock solid, so I will sacrifice with this one.


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[Freedom56]

My retirement income is derived from preferred shares, exchange traded notes, and short term corporate notes. I do not own any common stocks, mutual funds, or ETFs. Here are my responses to your questions:

Do you stay away from issues that are not cumulative preferred?

No - most quality preferred stocks are non-cumulative. I buy only investment grade preferred stocks from banks, insurance companies, and REITs where I have a high degree of confidence that they will pay their dividends. I normally pick up new investment grade issues wholesale (below par) before they are listed when they trade OTC. You should also consider exchange traded notes. They pay interest rather than dividends but are senior to preferred shares. I do not own any rate-reset s or convertible preferred stocks and would not recommend buying them.

What sources beyond Quantum on Line are good to research issues?

http://www.dividendyieldhunter.com/

Preferred Stocks: Closing Table - Markets Data Center - WSJ.com

Bonds Home

Before buying preferred stock, bonds, or notes from a company, do research on the company itself. How much do they earn? Can they support their distributions? You need to asses their risk of default.

How do you find out which issues are "fenced in"?

Quantum online can provide details of all issues.

QuantumOnline.com Home Page


What are the mechanics of the purchase/sale process when an issue is thinly traded? (If I were to place a limit order how does a potential seller become aware of my bid?)

I always use limit orders on buying and selling. You should never use a market order. The bid /ask price and size are always provided with your quote.


What general Due Dilligence do you perform?

I check the rating, and research the company. Issues rated BBB- and above are highly unlikely to cause long term pain. For example I own JP Morgan preferred stock (rated BBB-) the likelihood of this company skipping payments is extremely low.

Keep in mind investment grade preferred stocks, exchange traded notes/debt, and bonds have outperformed the market in 2014, 2015, and so far in 2016. There are becoming expensive. Before buying any preferred stock, note, or bond, check for call protection. In this low rate environment, companies are calling higher coupon debt and refinancing with lower coupon debt.

I have been actively managing my money for the last 30 years. This is after I got burned by full service brokers in the early 80's and realized I needed to become more adept and investing my money. 98% fund managers, asset managers, so called wealth managers, and financial advisers are total losers who are only interested in lining their pockets.

Hope this helps

[Mulligan]

Quote:

Originally Posted by Freedom56 My retirement income is derived from preferred shares, exchange traded notes, and short term corporate notes. I do not own any common stocks, mutual funds, or ETFs. Here are my responses to your questions: Do you stay away from issues that are not cumulative preferred? No - most quality preferred stocks are non-cumulative. I buy only investment grade preferred stocks from banks, insurance companies, and REITs where I have a high degree of confidence that they will pay their dividends. I normally pick up new investment grade issues wholesale (below par) before they are listed when they trade OTC. You should also consider exchange traded notes. They pay interest rather than dividends but are senior to preferred shares. I do not own any rate-reset s or convertible preferred stocks and would not recommend buying them. What sources beyond Quantum on Line are good to research issues? http://www.dividendyieldhunter.com/ Preferred Stocks: Closing Table - Markets Data Center - WSJ.com Bonds Home Before buying preferred stock, bonds, or notes from a company, do research on the company itself. How much do they earn? Can they support their distributions? You need to asses their risk of default. How do you find out which issues are "fenced in"? Quantum online can provide details of all issues. QuantumOnline.com Home Page What are the mechanics of the purchase/sale process when an issue is thinly traded? (If I were to place a limit order how does a potential seller become aware of my bid?) I always use limit orders on buying and selling. You should never use a market order. The bid /ask price and size are always provided with your quote. What general Due Dilligence do you perform? I check the rating, and research the company. Issues rated BBB- and above are highly unlikely to cause long term pain. For example I own JP Morgan preferred stock (rated BBB-) the likelihood of this company skipping payments is extremely low. Keep in mind investment grade preferred stocks, exchange traded notes/debt, and bonds have outperformed the market in 2014, 2015, and so far in 2016. There are becoming expensive. Before buying any preferred stock, note, or bond, check for call protection. In this low rate environment, companies are calling higher coupon debt and refinancing with lower coupon debt. I have been actively managing my money for the last 30 years. This is after I got burned by full service brokers in the early 80's and realized I needed to become more adept and investing my money. 98% fund managers, asset managers, so called wealth managers, and financial advisers are total losers who are only interested in lining their pockets. Hope this helps

Good sound advise, and thank you for sharing, Freedom. I share your concern of "buying expensive". But I have went about this concern in a different manner. Buying above par, past call issues that are tethered near par for call risk. Their yield is inherently higher than new issued ones because they were issued in a different rate environment. The price cant escalate to its market rate yield because of call risk. This does promote a bit of active trading though which may not appeal to some. For example the recent BGLEN price drop on call confusion with other 2 issues. Bought at $102.02, collected $1.76 divi and flipped about half my holdings (400 shares sold) between $104 and $104.50 in a months time....I love these low risk "shoot fish in a barrel" scenarios. I will keep the rest at 150 basis points above current yield market pricing and collect divis and dare a call.
I see the exact same thing that could happen with PVTBP. This 10% par issued dropped 2 bucks from call fear from company being acquired by a Canadian bank. SEC filings clearly showed they were assuming the debt. So minimum I will make 3.65 (7.3% annualized) if they call at merger completion. But I assume that may not occur due to the SEC filings and known Tier 1 capital levels of each company.
These are the issues I like to focus on as a substitute from being trapped in a perpetual low yielder. Though I will admit owning some such as CTWSO which is a layup safety wise and bought $6 under par also appeal to me.
I really wish more issues like PFK would come to market but no one will step up. That being a 2.5% base with monthly CPI kicker thrown in. Way better in my opinion long term than being tethered to 3 month t-bill or Libor.


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[Freedom56]

Instead of playing these preferred stocks, you may be better off buying short term corporate notes. I purchased EMC 2023 notes at 80.10 December 2015 speculating that the Dell merger may fall through. Even with the merger going through they are now trading around $96 for a 20% gain in 7 months plus interest. The coupon is only 3.75%. I also purchased Centurylink notes maturing in 2024 at $98.10 last month. They are trading at $103 now and have a coupon of 7.5%. Use FINRA bond search to find bargains that result from funds selling off holdings to raise cash.

[Mulligan]

Quote:

Originally Posted by Freedom56 Instead of playing these preferred stocks, you may be better off buying short term corporate notes. I purchased EMC 2023 notes at 80.10 December 2015 speculating that the Dell merger may fall through. Even with the merger going through they are now trading around $96 for a 20% gain in 7 months plus interest. The coupon is only 3.75%. I also purchased Centurylink notes maturing in 2024 at $98.10 last month. They are trading at $103 now and have a coupon of 7.5%. Use FINRA bond search to find bargains that result from funds selling off holdings to raise cash.

That is a great idea, and if I had a bigger wad of cash I would.. Im nowhere near 7 figures yet to buy decent lots and diversify. Bid/ask may kill me too. Also, the biggest problem is I am butting up to 28% tax bracket in retirement already with my pension. I have only a small amount of non taxable accounts, with most of my money being in taxable. I have to hunt and shoot those high quality 15% QDI's to keep my tax bill down and trade violently in my HSA and Roth (No 401k or IRA's). The liquidity of preferreds and smaller lot requirements will keep me in this arena. If I keep adding to my stash at the rate it is going, I may be able to get to that point, in a few years. But flipping non core holdings and shooting fish in a barrel with my HSA and Roth will have to be my strategy for now.


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[Slow But Steady]

I own a little KCC. Maybe I should buy some more. I know there was a partial call. Does anyone know how much is really left? That might affect the likelihood of the remainder being called.

[Mulligan]

Quote:

Originally Posted by Slow But Steady I own a little KCC. Maybe I should buy some more. I know there was a partial call. Does anyone know how much is really left? That might affect the likelihood of the remainder being called.

Slow there is only 3.5 million left out of the original oversubscribed $96 million float. This is my take.. I love the issue but not the price, and recently sold out....The yield is great dont get me wrong. If it was entirely uncallable I would have continued to own. But when it sold close $30 I had to sell.. The call price at $27.68 or so is too punitive of a potential loss to own at $30. If it would go back under $29 I would gamble on it again... The underlying bond is uncallable, but you dont own the bond. You own shares of a trust that actually owns the bonds. There are "call warrant holders" who can call the rest... They have actually called in 95% of it already...Will the last 5% be called? Thats a gamble I am willing to take at 28.90, but not at $30. Cap gains spend just as good as income dividends. I take the bird in hand and look to raid the nest again later if pricing allows.


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[Slow But Steady]

Quote:

Originally Posted by Mulligan Slow there is only 3.5 million left out of the original oversubscribed $96 million float. This is my take.. I love the issue but not the price, and recently sold out....The yield is great dont get me wrong. If it was entirely uncallable I would have continued to own. But when it sold close $30 I had to sell.. The call price at $27.68 or so is too punitive of a potential loss to own at $30. If it would go back under $29 I would gamble on it again... The underlying bond is uncallable, but you dont own the bond. You own shares of a trust that actually owns the bonds. There are "call warrant holders" who can call the rest... They have actually called in 95% of it already...Will the last 5% be called? Thats a gamble I am willing to take at 28.90, but not at $30. Cap gains spend just as good as income dividends. I take the bird in hand and look to raid the nest again later if pricing allows. Sent from my iPad using Tapatalk

Thanks, Mulligan.

I'm in at about 1 divi over the call price, so I guess I'll stand pat and wait for a lower price.

Prices on these issues don't seem to be going down at the moment, though. I find myself owning about half of what I'd like to own, but not seeing prices I want to pay to invest the other half.