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

[Slow But Steady]

I have a fair amount of money that I need to put to work, but I'm having a hard time paying this week's prices. Is that what you folks are feeling too?

Your ideas are welcome.

Slow

[Slow But Steady]

By the way, we've been talking a lot about flipping. I've done it a time or two myself, but here are some results of my usual buy-and-hold strategy.

I opened a position in Weingarten Realty, a Houston-based shopping center REIT, in my IRA in 1992 for about $10,000, reinvesting all dividends. I invested another $10,000 in 2008-2009 as the market was going down. The cheapest shares I got were at a bit less than $9, and I had to grit my teeth when I placed the order.

WRI is now at $41+, and my $20,000 has grown to $135,000.

I also bought WRI-F in 2009 at about $8. They very reliably paid $1.62 (about 20% yield on cost) every year until they were called in 2015. This was my first venture into preferred stocks.

I bought a position in AHT in 2005 for about $18,000 and reinvested all dividends. Again, I bought more when the market was cratering in 2009, investing another $5,000 or so. The lowest price I paid was $0.86. Obviously there was some doubt about whether the company would survive. That $23,000 investment is now worth about $78,000.

I really don't know how these results would have compared to just buying the S&P 500, but I'm pleased with the outcome.

Edit to add: I also got killed on some GM baby bonds, but I don't want to talk about that right now.

[Winemaker]

More wailing and gnashing of teeth, Morgan Stanley Preferred G, called away in August.

We've been together for so long...warm and fuzzy during the Great Recession...our bonds got stronger over the last few years...we began to take each other for granted.

And that's when all relationships start to fail, when you take each other for granted. I should have been more supportive, maybe, more appreciative of the 6.25% yield.

I'll open a '13 Cab Sauv tonight and toast to the good times.
Here's to mud in your eye.......

[Mulligan]

Quote:

Originally Posted by Slow But Steady By the way, we've been talking a lot about flipping. I've done it a time or two myself, but here are some results of my usual buy-and-hold strategy. I opened a position in Weingarten Realty, a Houston-based shopping center REIT, in my IRA in 1992 for about $10,000, reinvesting all dividends. I invested another $10,000 in 2008-2009 as the market was going down. The cheapest shares I got were at a bit less than $9, and I had to grit my teeth when I placed the order. WRI is now at $41+, and my $20,000 has grown to $135,000. I also bought WRI-F in 2009 at about $8. They very reliably paid $1.62 (about 20% yield on cost) every year until they were called in 2015. This was my first venture into preferred stocks. I bought a position in AHT in 2005 for about $18,000 and reinvested all dividends. Again, I bought more when the market was cratering in 2009, investing another $5,000 or so. The lowest price I paid was $0.86. Obviously there was some doubt about whether the company would survive. That $23,000 investment is now worth about $78,000. I really don't know how these results would have compared to just buying the S&P 500, but I'm pleased with the outcome. Edit to add: I also got killed on some GM baby bonds, but I don't want to talk about that right now.

Slow, the only reason why Im flipping is just because of the current market we are in. I just dart in and out to make quick gains and get out to minimize call loss chances. Its easy for Winemaker to toast a sincere found goodbye to an issue he has held long and started under par. But when your origin point begins above par, one has to be mindful of a quick purchase only to get smacked with a quick call.
Over a year ago Coolius and I gambled on high yielders DQUEK and ELUOP and that got called months after our purchase. However we captured dividends and still made a small profit despite call as we could get quality issues barely above par. Now you are looking 3-8 dividends above par on some quality issues and a call would cause one to throw the wine glass against the wall instead of celebrating the good times!
I keep darting in and out and also holding call risk issues because I do not want to get caught in the downdraft of holding a low yielder. Take UEPEN.... In the 1940s when someone bought this 3.5% utility preferred do you think 70 years later in "record low" rates this issue would still be $12 under par even now? Just think what this $100 par issue traded for the 1980s if it cant get back to par even now with an investment grade rating. I bet it was trading in the $30's.


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[Sunset]

Quote:

Originally Posted by Mulligan .... I keep darting in and out and also holding call risk issues because I do not want to get caught in the downdraft of holding a low yielder. Take UEPEN.... In the 1940s when someone bought this 3.5% utility preferred do you think 70 years later in "record low" rates this issue would still be $12 under par even now? Just think what this $100 par issue traded for the 1980s if it cant get back to par even now with an investment grade rating. I bet it was trading in the $30's.......

This is an extreme example but it shows clearly something I have been thinking about lately.
Buying a preferred could end up being an income trap, which I think Mulligan has touched on when he says he doesn't plan to sell but collect the dividend forever.

Take the UEPEN example, I could buy it now at $88. Lets pretend interest rates stay the same for 30 more years. (a very excellent event for preferreds)

Instead I could buy VTI which pays 1.9% but, and here is the trap UEPEN in 30 years will still be worth $88 , but VTI will be worth about $120 more than current price (lots of assumptions here, based on past 10 yrs.) and will have paid about $36 less per share in dividends that UEPEN.
Net effect is that VTI is still a better deal as it's worth an extra $84 per share at the end of 30 years compared to UEPEN.

Higher rated Preferreds might be fine, because they are more sheltered from interest increases and the large differential in dividends over the next few years could be enough of a head start to win the race.

Is my thinking odd , correct , or just wacked ?

[Mulligan]

Quote:

Originally Posted by Sunset This is an extreme example but it shows clearly something I have been thinking about lately. Buying a preferred could end up being an income trap, which I think Mulligan has touched on when he says he doesn't plan to sell but collect the dividend forever. Take the UEPEN example, I could buy it now at $88. Lets pretend interest rates stay the same for 30 more years. (a very excellent event for preferreds) Instead I could buy VTI which pays 1.9% but, and here is the trap UEPEN in 30 years will still be worth $88 , but VTI will be worth about $120 more than current price (lots of assumptions here, based on past 10 yrs.) and will have paid about $36 less per share in dividends that UEPEN. Net effect is that VTI is still a better deal as it's worth an extra $84 per share at the end of 30 years compared to UEPEN. Higher rated Preferreds might be fine, because they are more sheltered from interest increases and the large differential in dividends over the next few years could be enough of a head start to win the race. Is my thinking odd , correct , or just wacked ?

This is just my opinion, but I dont think it is a fair comparison between index funds and preferreds (quality ones). I would think over a 20 year period the commons will provide more wealth. If looking for current income and not cap gains and rising divi from lower point, I dont think we are fair to compare them on same terms.
It really boils down to purpose and goals. Coolius and I buy similar issues, but our goals are different. He is looking for income, but also maintains a diversified portfolio too. I am hiding out here and love the relative safety of issues. But give me a heckuva market correction and I will be willing to jump in the commons.
Personally anything I have over 6% I have little concern over much price slippage besides the dollar or so wobbling.. And I also would be fine just collecting 5% also and I do not need a certain amount of income. If 10 year goes to 3% history shows little damage will be done to a 6% utility preferred. But I cannot figure out correctly how much damage it would do to a 5% one. There in lies my hesitancy. But yes I do own some. I have 1000 shares of CTWSO and will never consider selling this. And average purchased yield is about 5.3%. But its gold in my mind.


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[Mulligan]

But Sunset....I maybe missing the entire point. The question may not be what will happen to 5% issues on modest rate hikes, but what would happen to 4% issues as we may be heading there instead. Read this informative link on a broader basis what is happening.

http://boards.fool.com/reit-preferre...?sort=postdate



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[Slow But Steady]

I own the preferreds as part of my fixed income allocation, and their purpose is to provide diversification when common stocks are going in the ditch. (Now that I'm retired, I hope I never again have a 2009-style purchasing opportunity when everything is going in the ditch.)

To me, therefore, comparing a low-yielding preferred like UEPEN to VTI isn't really of interest. For me, the question is whether to stay in cash, buy more of the relatively high yielding but less liquid preferreds at current prices, or invest the cash in a preferred ETF like PFF and/or PFXF.

[Mulligan]

Quote:

Originally Posted by Slow But Steady I own the preferreds as part of my fixed income allocation, and their purpose is to provide diversification when common stocks are going in the ditch. (Now that I'm retired, I hope I never again have a 2009-style purchasing opportunity when everything is going in the ditch.) To me, therefore, comparing a low-yielding preferred like UEPEN to VTI isn't really of interest. For me, the question is whether to stay in cash, buy more of the relatively high yielding but less liquid preferreds at current prices, or invest the cash in a preferred ETF like PFF and/or PFXF.

I share your lack of enthusiasm for 4% issues! I hope that isn't our best option, soon, too!!!!
The trouble with those two funds is they are still buying into relatively illiquid issues and feeding frenzy has been high. A fund masquerading as liquid really is made up of illiquid issues (all preferreds are considered illiquid, the ones I own are super illiquid). There could be a stampede out the door on those and the illiquids which cannot be bought from the funds would side step the issue like many that I own.
I cannot beat a common stock index fund over any period of time. But it is easy to beat a preferred stock fund because they track bogus made up preferred indexes which have no relevance compared to the S&P 500 does with a common stock index fund.
But if absolute capital preservation takes priority over yield, its a tough market now everywhere. The best recent trades are the "chaos trades". Where people were dumping from confusion. That is why I hit BGLEN and PVTBP hard....Real hard...BGLEN has already paid off and PVTBP largely has too, but its upside is coming and I will wait. I booked easy profits with BGLEN and will sit on the other 400 as its all gravy now.
You have to find those and hit them hard!


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[Mulligan]

Slow I separated my post to show what I do when cash starts sitting around... I recently sold out of a few actual sub 5% ers I had for a few weeks and chickened out holding them...Made enough profit for a good steak dinner for 2 weeks but all I wanted was out... After thinking a bit and having no hot leads, I went back to what I usually do. Went back and bought a few hundred shares each of PFK and GJP. One is term dated call in 2018 and other is an adjustable. I also bought back 100 shares of CBB-B at par. I sold it for a quick gain a few weeks back as I would rounding up cash to load up on PVTBP. Cincinnati Bell holds promise as a modest risk issue paying about 6.75 at par. Its been around since the late 1990s I believe. They are doing what preferred owners want to hear...They are reducing debt, as they are spinning off a REIT that made them some good bucks and are using cash to reinvest in their core business and reduce debt. I doubt GJP and PFK though excellent issues suit your goals for owning preferreds. But you may wish to investigate CBB-B as you have an issue near par, relative high yielder, and has a long history of paying.


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[Winemaker]

A good article in Seeking Alpha about how Public Storage, a high quality REIT, recently issued a perpetual preferred yielding 4.95%, at $25.00 par, of course. The writer, admired PSA for lowering their cost of capital, because they replaced higher % preferreds that they called. He did not recommend purchasing the new issue; his thought process is the same as most bonds, rising rates would lower the value of the security.


What I liked about the article was the following comments and other investors sentiment and perspective. Some welcomed a 4.95% yield instead of a putrid
0.3% for their cash. Others thought it would be a great place to have a controlled capital loss to harvest while collecting a 4.95%, others thought the low interest rate would endure for several more years and even go negative, creating a future capital gain. Sure are interesting times.

I apologize for not posting a link, I get Seeking Alpha as an app on my phone and don't know how to link the link.

[Mulligan]

If you are like me, I get more info from the commenters than the articles. Many comments posted have helped prevent me from chasing yield in some issues.


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[Slow But Steady]

Thanks for the ideas, Mulligan. CBB-B is one that hadn't been on my radar screen, and, as you said, is in line with my requirements.

[Mulligan]

Quote:

Originally Posted by Slow But Steady Thanks for the ideas, Mulligan. CBB-B is one that hadn't been on my radar screen, and, as you said, is in line with my requirements.

Its getting tough out there, Slow. I found me a partial called pretty safe little issue yielding 7.2% last night...was going to buy 400 shares this morning and POOF! Right out of the gate it jumped $1.50 about 6% before I had a chance...WTH!!! Its like they knew I wanted it and front ran me...I may just put it in short term or an adjustable. May buy some more CBB-B if it drops a bit though.Even it has risen in past few days...Its either get in now or get left behind. Or this is it already and the lambs are being lead to the slaughterhouse. I dont know which way is the outcome, but I wont chase yield on risky crap like MReits or buy too much low perpetuals. Preservation of capital is more important to me than yield is.


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[Slow But Steady]

I bought a few TNP-B the other day, for a few cents below par. It's another one of those shipping companies that issue preferred to build tankers. Looks like they are covering the dividend well.

It's should be called in 2018, or else the interest rate will go way up. I wish I'd bought a few more, because now it's up to $25.49

[Mulligan]

Quote:

Originally Posted by Slow But Steady I bought a few TNP-B the other day, for a few cents below par. It's another one of those shipping companies that issue preferred to build tankers. Looks like they are covering the dividend well. It's should be called in 2018, or else the interest rate will go way up. I wish I'd bought a few more, because now it's up to $25.49

If one is looking for higher yielders, the shipping industry provides it. Probably ok and the failure to redeem benefits provided the company has access to funds. My only recommendation would be to stayed "measured" in buying these. Their debt structure above the preferreds is massive (all shipping is since they are all so capital intensive). They always have to roll over big sums of debt too. If they get caught in a bad shipping rate cycle or overbuild competition (happens frequently and a glut is projected in the coming few years) this can cause them to crater bad.
Just mentioning this to stay aware. You may already know this, though. I played a shipper Seaspan SSW-C and made some good quick bucks. Only owned it a month or so earlier this year as I knew it was getting called with the same provision you mentioned with this issue. I lack the proper courage and conviction it takes to hold shippers in general though so I stay away.


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[Hamster]

Quote:

Originally Posted by Mulligan Its getting tough out there, Slow. I found me a partial called pretty safe little issue yielding 7.2% last night...was going to buy 400 shares this morning and POOF! Right out of the gate it jumped $1.50 about 6% before I had a chance...WTH!!! Its like they knew I wanted it and front ran me...I may just put it in short term or an adjustable. May buy some more CBB-B if it drops a bit though.Even it has risen in past few days...Its either get in now or get left behind. Or this is it already and the lambs are being lead to the slaughterhouse. I dont know which way is the outcome, but I wont chase yield on risky crap like MReits or buy too much low perpetuals. Preservation of capital is more important to me than yield is.

I really only got into preferreds recently in part based on the discussions here. Many of mine, however, are the crappy mReits you refer to above. I agree that these are marginal investments, but they have done very well so far, all bought under par and up from about 6% to nearly 30% in half a year plus some very nice dividends.

That said, I think that ship may have sailed and I should probably move on to something else. I just got rid of one of my sketchier holdings, RSO-B, at a nice profit and will probably get rid of quite a few of the rest in the next few weeks. The only ones I still feel at least temporarily attached to are VER-F and PBB.

That should leave me with a fair amount of cash which I unfortunately have no idea what to do with. I would most likely have put it into some REIT common, but those have all had a good run up as well so I expect I will just sit on the side lines for a while waiting for something good to pop up.

[Mulligan]

Well, I need to walk that back a bit, Hermit. Poor terminology on my part. I need to have referred Mreits and Shippers as "higher risk, higher reward" and not as "crap". Many people can trade in and out of them very successfully. They are just too complicated for me. Its basically a measure of trust. Nobody can understand the processes of hedges, swaps, and derivatives that are apart of that Mreit business. Just me, but I need an "allusion of understanding" before I can invest in something. Mostly so I don't panic and think its heading for bankruptcy on any brief sell off. If I was a more aggressive investor and understood them better, my viewpoint and attitude towards them would not be so negative.


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[Coolius]

All of us are aware that the past 2 years of low interest rates have been good for the income sector - and Preferred Stocks of every stripe ( with the notable exception of energy ) have participated in this "rising tide raises all boats".

However, there will come a time in the future when rates will rise again - and no one honestly can know when this will happen, despite what the financial media so breathlessly screams daily.

I try to buy stocks for income stability, which drives me toward quality issues. A Call is the bogeyman that might appear at any time, and I have to gauge that risk appropriately. A fine balancing act between yield, safety, and call risk that I am not always successful in maintaining.

I tend to believe in the "lower for longer" rationale, so have bought issues which were lower than my original self imposed yield floor; and if I should be wrong, so be it.

Yes, difficult times for income investors - actually difficult times for ALL investor types - TR, income, et al.

[Mulligan]

You think its tough now, Coolius? Wait until you see the likes of UEPEN, DQUEN, and literally dozens other of these high quality investment grade preferreds of low yields from 3 generations ago still trading finally return back to par for the first time in over a half century....Then you know for sure difficult times are here for finding yield, ha! They are not there yet...But they are creeping ever so closer......I can here is now from a 100 year old man cheering..."Finally after all these decades of waiting I can sell my UEPEN for the price I paid for it".


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