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

[Mulligan]

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

Any reason for others to sell off this security so soon after buying it?

I dont think so... I certainly didnt sell because of any company strife. If it hadnt had the bump I would have held. This was just set up for a classic flip trade due to quick selling pressure. That was my original purpose. I also own IPWLK so for long term purposes I dont wont to be over concentrated in it long term as I am keeping IPWLK in my permanent stash.
AES-C and IPWLK ultimately share same parent...Though IPWLK is modestly ring fenced with its original parent IPALCO....AES bought IPALCO about 15 years ago, and IPALCO is essentially IPL (IPWLK).

 

[Mulligan]

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

I also bought some RNR-C yesterday at 25.19. There is no call protection on this one. New issues coming to market have very low yields relative to their duration. I recently picked up Qwest and US West bonds maturing in 2031 and 2028 (both part of Centurylink) at 96.10 and 90.30. The coupons are 7.75 (YTM 8.03) and 6.875 (YTM 7.5) respectively. I also own Centurylink 7.5% notes that mature in 2024 (bought at 97.2 now at 107). All rated Ba1, BB+.

I think you made a wise trade with RNR-C. Maiden (also a reinsurer)is bringing to market this week a dreadful 5.62% non cummulative, Ba1 ish issue... Compare that to RNR-C cumulative 6% plus, investment grade, and bought under next divi plus par... Right now, I am very comfortable owning something that may get called a divi or 2 later...And if it doesnt happen we get above current market yield.
I didnt comment on the telecos only because I havent followed them and have little to offer in knowledge. I just dont have enough tax free space to really expand much into debt issues. Shame on me for not putting money away more when I was working! Now I would just get killed tax wise owning these in my taxable account.

 

[Mulligan]

Just my know nothing opinion, but I sense a bit of change in the air on rates and attitudes toward income securities. Many have traded the past year like a growth stock. These could easily retreat to prices of a year ago... Also a good time to review "Taper Tantrum" prices of preferreds from 2013.... Very nasty.... I am presuming my flipping opportunities are over for now. That is why I repositioned some issues to help mitigate ( but never eliminates) downward movements of preferreds in general.
Most of my issues traded during 2013 taper tantrum when 10 year went to 3%. There will be some unavoidable losses. Yet the dividend streams will continue and all proceeds will be reinvested in issues with then higher yields. So that is my mindset. My current issues are AILLL/AILNP, MNR-B, MNR-C, UEPCO, IPWLK, ALLY-C, GJP, FIISO, CTWSO, CTWSP, and RNR-C, PVTBP (just a small amount mostly sold out).

 

[Coolius]

Just my know nothing opinion, but I sense a bit of change in the air on rates and attitudes toward income securities. Many have traded the past year like a growth stock. These could easily retreat to prices of a year ago... Also a good time to review "Taper Tantrum" prices of preferreds from 2013.... Very nasty....

I agree with your assessment of the income sector. Since Friday, it seems like the worm has turned. The momentum is decidedly down, and IF we get a surprise hike next week, damage to Preferred Issues will be extensive. Even if there is no hike, the mood has darkened considerably; it's prudent to reduce exposure to the sector.


Reluctantly sold my position in WFC-L, still made profit, but half of what it was last week. Expect that I can buy back in, around the $1,240 price level, or even lower.

 

[Freedom56]

I own 2000 shares Maiden Holding Pr C which pays 7.125. I picked those up mid February for $22.70. I also own MHNB which pays 8% and MHNC which pays 7.75%. I bought both below 25 last February. The funds from new issue is probably going to be used to call MHNB on 3/27/17. The low yield is probably due to the rating increase from BBB- to BBB for Maiden Holdings a couple of weeks ago. RNR-C is one of the rare preferred stocks or notes that I bought above par. I usually wait for sell-offs in the markets to pick up quality preferred, exchange traded notes, corporate notes, and bonds. ETFs and mutual funds are forced to sell if they have to raise cash for redemptions. This creates great opportunities for income investors who manage their own portfolio.

 

[Freedom56]

I agree with your assessment of the income sector. Since Friday, it seems like the worm has turned. The momentum is decidedly down, and IF we get a surprise hike next week, damage to Preferred Issues will be extensive. Even if there is no hike, the mood has darkened considerably; it's prudent to reduce exposure to the sector.


Reluctantly sold my position in WFC-L, still made profit, but half of what it was last week. Expect that I can buy back in, around the $1,240 price level, or even lower.

In my opinion, a rate hike will certainly impact short term rates, but long term rates will remain flat. Leveraged CEFs will be impacted more than perpetual preferred stocks, and long term notes, and bonds. We are already starting to see a flattening of the yield curve which will continue and eventually invert if rates continue to rise. Which will be bad for stocks but okay for long term income securities.

The sentiment has changed slightly but it is nothing like August 2015 or February 2016 where we had massive liquidation by funds.

I think low rates will be around for a while. There is far too much debt coming due in the next 6 years for many companies to survive a large rate hike.

 

[Mulligan]

In my opinion, a rate hike will certainly impact short term rates, but long term rates will remain flat. Leveraged CEFs will be impacted more than perpetual preferred stocks, and long term notes, and bonds. We are already starting to see a flattening of the yield curve which will continue and eventually invert if rates continue to rise. Which will be bad for stocks but okay for long term income securities.



The sentiment has changed slightly but it is nothing like August 2015 or February 2016 where we had massive liquidation by funds.



I think low rates will be around for a while. There is far too much debt coming due in the next 6 years for many companies to survive a large rate hike.

I agree Freedom. What I didnt say and should of is the drop I think may come from fear and first timers bailing when they notice they dont go up everyday...But... Things will settle down again as people will realize there is no where to go for income.

 

[Texas Proud]

One of the things that is surprising to me is the rate reduction happening on the refis that I see...

Think about it... MNR-A was trading in the 7.3% yield... now, MNR-C is out and trading in the 6.2% yield... but nothing has changed to the underlying company that is paying these out...

Now, it could be that if MNR-A was not callable it would have been trading as low as 6.2% but people did not want to take that risk... then I look at others that can be called and see prices much higher...

 

[Running_Man]

I don’t for a minute believe ANY of the central bank talk of raising rates. What I saw was Ben Bernanke saying the Fed has to be ready to go to negative if possible. I think it is more likely the 5 year is zero a year from now than 2.5 percent, but my opinions are not worth much and time will provide answers. It has been 9 years now of continual talk of higher rates just around the corner, better watch out!!

WFCPL is in a little trouble because Wells Fargo makes a settlement on the accounts signed up and now the US Senate is looking to go after Senior Management of the Bank. There is definitely some risk on that one.

 

[Mulligan]

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

There is always going to be some craziness there. Now take MNR...CEO said they would get 100-150 BP improvement when they call, and he was correct to the high end. Rates are definitely a sellers market now. Although MNR's finances have tightened up nicely since B's issue... Speaking of B....I have bought 700 shares of MNR-B to go with my 700 of MNR-C... I bought B to park some money and hideout and walk right into the call on purpose. Stock has dropped nicely since the A call. I am guaranteed annualized 3% return sweat free.... BUT....As to your comment there is another reason why I bought...In 6 months, I will get an easy opportunity to flip for what I just paid for and collect 2 divis...People are yield chasing fools... Look at O-F and where it is trading...Its a guaranteed loser holding until call date. That is DOA in Feb... Look at DTZ, a 6.5% par trading at $26.25 callable in Dec...My Lord they have another issue trading at a 5.3% yield not callable yet. And you dont think they wont call DTZ? People are going to get their face smashed owning that...The list goes on. Sellers of B will lighten up, people will forget, and I will make easy money on this. Nothing wrong with stacking nickels to make a buck...Its still a dollar.

 

[Coolius]

Running Man, agree with your comments about WFC-L. For the same reason I sold my entire position today, netting a moderate gain.

WFC is going to be in a world of hurt, and its reputation will suffer; I am expecting WFC-L to drop as a result, might buy back if the yield goes back above 6% ( stock price of $1,250 or lower ).

 

[Slow But Steady]

Hello, ER friends,

I'm now back from an extended vacation. I had a standing order in to sell CNTHP at $56.10, and someone took half of it while I was away. Unfortunately, no takers on the sell order for KCC at $33.55.

I took a small bite of IPWLK with the proceeds of the CNTHP sale. Soon I'll have a bit more cash to put to work after I receive the proceeds from the BGLEN call.

I'll keep my eye on WFC-L, but I'll be surprised to see a big drop. I don't think the company is in that much trouble. It's getting harder and harder to find issues I'm eager to buy.

 

[Mulligan]

Hope the vacation was a good one, Slow! One you may keep an eye on is STAG-C. Has started to retreat some, and may bend some more...I know Coolius has it... I am watching it, but would have to sell something to do it and I am pretty comfortable with what I got since I have lightened up on issues past call trading over a divi past call.

 

[Sunset]

I'm wondering if for STAG REITs if it is better to buy the common stock vs the preferred.
For example with STAG , the common stock has a div yield: 5.97% vs
6.88 for the preferred share (if you get it at par).

However since 2011, the stock has risen 90% to $23.25 , which is a good appreciation that a preferred share normally does not do.

Really as long as the common stock over time does better than 1.4% price appreciation per year on avg, it will beat the preferred share.

 

[Mulligan]

Yes, I would never compare the common with the preferred of the same stock. I do not own any common stock. I just compare value and yields against other preferreds. I will leave common stock picking to the real smart folks!

 

[Slow But Steady]

For me, common and preferred stocks occupy a different place in the portfolio. For that reason, I wouldn't be comparing STAG common to STAG-C, but rather to other REIT common shares.

 

[Coolius]

Sunset,

I came across this info on the Motley Fool REIT board, by a poster GracePeace. With full credit to Gracepeace, I reproduce it here:

Industrial REITs such as STAG Industrial (NYSE:STAG), Prologis (NYSELD), and Duke Realty (NYSERE) have truly been on fire this year. I bought STAG some time ago because I liked the growth potential that a newer and smaller cap Industrial REIT such as this offered. They are acquiring new properties at a rapid rate and continuing their targeted growth spree. Their current potential acquisition pipeline is over $2 B, The company has tripled the number of Industrial properties owned (300) since they went public in 2011.

They also paid an above average dividend (6% at the time of purchase, approx 5.6% now).

Stag's FFO has been growing this year at roughly 8%.

Payout ratio is approx 83%

Stag has maintained excellent geographic, tenant, and industry diversification throughout their growth cycle.

Stag has steadily been growing its dividend:
2012/$1.07
2013/$1.20
2014/$1.24
2015/$1.30
2016/$1.39
2017/$1.44 EST.

Good management with a solid track record

 

[Sunset]

For me, common and preferred stocks occupy a different place in the portfolio. For that reason, I wouldn't be comparing STAG common to STAG-C, but rather to other REIT common shares.

Normally I think the same way.

However whether one buys the common or the preferred stock, one is basically hitching the wagon to the company's performance and future.

Normally the dividend on a common stock is in the 2% or 3% range, so there is quite a difference when getting the preferred at 6% or more.
But when they are close, the disadvantages of a preferred share could tip the balance to say the common stock is a better purchase.

I'm not saying preferred shares have no advantages, but that with a high common stock dividend, one of the primary reasons a preferred share is attractive is largely removed.

I'm tossing this up for discussion, and as it's a thought I had when buying MNR-C , that MNR itself might be better, and with STAG this seems even more true.

But maybe I'm missing something ?

 

[Mulligan]

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

Its hard to tell... The thing is with common stocks is they still are largely hitched to the same wagon, while preferreds trade differently. .... Now as to MNR common vs. preferreds there has been little divi growth the past 10 years for commons... It may be ramping up some though...But someone who researches MNR says it is a "python passing a pig through it". Meaning this is just a quick uptick in revenue development for company and growth will moderate. However, my biases isnt so much in picking common or preferred. I am picking up income all while feeling the risk is less in preferreds now than common stock. So I am not a good resource to compare the two choices...If I can get a 15-20% market sell off, I will not be looking for common stocks, I will be looking to dump money back into mutual funds again. Im a quasi market timing stock Boglehead! But individual preferred stock picking is a relative childs game compared to picking common stocks, I believe....As long as long end bonds dont spike significantly, it is hard to loose much money in quality preferreds no matter which you choose provided you are a bit patient on entry point.

 

[Running_Man]

The major advantage of preferred stocks is that the dividend in most cases cannot be cut even in times of problems, so that if cash flow issues came up for a REIT then the dividend would be cut but preferred dividends would continue to be paid. Many REITS over the years cut but do not eliminate their dividend. So as Mulligan says the safety is increased at the cost of no increase in income.

 

[Mulligan]

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

To add to RM's thoughts, I have noticed (from afar as I do not invest in high yield preferreds) that some common stocks get roasted over time in price and/or divi cuts, while the preferred stays strong from that company. MReits are a prime example of what RM is referring to.

 

[MooreBonds]

Picked up some GBLIZ baby bonds at 25.66 today, yield to call (Aug 2020) about 6.9%. Final maturity 2045. It's a re-insurer. I think I only have two other insurance company preferreds in my stable (AFSS and NGHCZ).

 

[Running_Man]

So no increase by the FED as at least I expected, the FED also has cut their 3 year economic growth rate to under 2 percent. Now on CNBC they are SURE, SURE SURE that rates will be raised in November or December. Meantime Krugman is giving Bank of Japan advice over the weekend to lower interest rates to below negative one percent, (if you want some good entertainment go read his comments and that his justification is that even if inflation were to get out of hand and implode the value of bonds it will make the level of debt irrelevant and save Japan in that manner) and Ben Bernanke is giving advice that the FED should be studying on how to implement negative rates. So now we can start another 3 month cycle—— remember in January Janet Yellen stood up in a press conference and stated that she believed there would be 4 rate increases in 2016. The economy is in a deflationary environment, everything being done is to lower prices with the exceptions of rent and health care.

So for me for now the holding of preferred stocks continue to be a valid fixed income asset class.

 

[Running_Man]

And looking at the FED’s outlook on expected short term interest rates at the start of the year the expected interest rate by the end of 2017 was 2 percent it is now 1 percent end of 2018 was 3.25 percent and now is just under 2 percent. And there is talk from economists that these forecasts should be ceased because these forecasts have been so poor. The FED has said in the space of nine months, while saying the economy is growing nicely….. the expected increase over the next 2-3 years is only 1.5%, in response to a question Janet Yellen let stand the assumption by forecasts coming down in essence the FED is tightening by keeping interest rates the same. At the forecast rate, which I still feel is overly optimistic even with the FED cutting their forecast by 1/2 percent per year in just the last 2 months, you are talking worst case of a 4 percent 30 year treasury meaning 6 percent preferreds will still be a very good investment.

Those that got the MNR-C under par did well it has moved to 25 1/4 along with other preferred taking a move up as the threat from competing rise in rates has been disapated.

 

[Freedom56]

raising rates will just result in an inverted yield curve which is good for perpetual preferred stocks and mid to long term bonds.