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

[Coolius]

There are some MLP preferreds that pay "guaranteed income " and not affected by issues such as depletion, recapture, or UBTI. Examples are PAGP, LGCYP and others. The income is reported on K-1, but in a taxable income is considered an interest payment and taxed accordingly

As MLPs enjoy tax deferred and other benefits, the "conventional wisdom" is to keep these in a taxable account. Hence MLP preferreds who do not have the same benefits are usually in a tax-deferred account.

If MLPs are kept in a tax deferred account and UBTI exceeds $1,000, there will be tax due. Best to Google for this subject if you think you might be affected. It is very complex.

 

[gooddog]

Thank you for the responses, that clears up the tax issues end of it. I'm not planning on getting into any MLPs, just want to go the preferred stock route, and a couple of regular dividend stocks like AT&T.

Not a fan of bonds, and looking at doing a 75% pref / 25% stock mix. That said - that 75% would leave a lot of 5k chunks to be bought, which brought up the question of what % of a total portfolio should each individual pref be. As an example, if a person has 100k to invest, then it is feasible to have 20 5k positions. What if a person has 1,000k to invest? That would be 200 positions. At this point is it better to just go into pref ETFs? Asking this because I noticed that 5k seems to be a position forum members are comfortable with. There must be some logic behind it. Again, want to thank you guys, when I had questions a few years ago, your input was very well thought out and helpful.

 

[RicDee]

Thanks Coolius,
Is this the MTB you posted about
$63.75/$1075 = 5.9%
M&T Bank Corp., 5.00% Fixed Rate Cumulative Perpetual Preferred Stock, Series A
Ticker Symbol: MTB- CUSIP: 55261F609 Exchange: NYSE
https://www.nyse.com/quote/XNYS:MTBp
RicDee

 

[Coolius]

Thanks Coolius,
Is this the MTB you posted about
$63.75/$1075 = 5.9%
M&T Bank Corp., 5.00% Fixed Rate Cumulative Perpetual Preferred Stock, Series A
Ticker Symbol: MTB- CUSIP: 55261F609 Exchange: NYSE
https://www.nyse.com/quote/XNYS:MTBp
RicDee

Yessir! That's the one.

The yield is higher than face coupon rate because the rate reset to a higher level in 2013. Perhaps this has kept the issue off some screens and under the radar - could be a reason for the very illiquid action.

Note that this is a Cumulative issue - a rarity in the Financial Preferred sector.

Gives me a rush of Adrenalin when I see the price drop by huge amounts in a single trade. I see it is down $44.80 now, -4.17%, on 25 shares.

Live dangerously!!

 

[Mulligan]

Good dog, I wouldn't be afraid to just put it all in one issue. Buy 1 share of WFC_L to get the ball rolling. Of course I am more a utility honk. May times though they need a 100 share bid to get noticed if you don't pay ask which usually isn't prudent. But I buy issues so safe usually I would lose no sleep having all my dough in an Ameren Illinois preferred. As far as a 1000 goes, ya gotta start somewhere. Heck today I only landed 12 shares today on an old issue. But it hasn't traded a 100 shares since 2002. And with good reason....There are only 800 shares left outstanding .

 

[Sunset]

Thank you for the responses, that clears up the tax issues end of it. I'm not planning on getting into any MLPs, just want to go the preferred stock route, and a couple of regular dividend stocks like AT&T.

Not a fan of bonds, and looking at doing a 75% pref / 25% stock mix. That said - that 75% would leave a lot of 5k chunks to be bought, which brought up the question of what % of a total portfolio should each individual pref be. As an example, if a person has 100k to invest, then it is feasible to have 20 5k positions. What if a person has 1,000k to invest? That would be 200 positions. At this point is it better to just go into pref ETFs? Asking this because I noticed that 5k seems to be a position forum members are comfortable with. There must be some logic behind it. Again, want to thank you guys, when I had questions a few years ago, your input was very well thought out and helpful.

I would be extremely reluctant to put more than 5->10% in preferreds, because I am a long term investor, and I believe (and could be wrong) that over 20 years an investment in VTI will outperform a bunch of preferreds paying 6% currently.

Because if rates do go up 2% over the next few years, preferreds will probably act like infinity bonds and drop a lot

If you are looking for a bond type thing, you could also consider BSJJ
which has a yield of 4.94% (or pick a different similar collection). These are a fund of bonds that all mature the same year and then return your purchase price of the bonds that survived to you. Similar to yourself buying a 100 or so bonds and holding to maturity.

Of course I do have some preferreds because its possible interest rates will stall or rise slower than expected.

 

[Mulligan]

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

That is always good info to remind, Sunset, for new readers not following the whole old thread. They are not panaceas. And one needs a specific need for them. I am retired and am looking for an income spigot to open up if ever needed. As of now I just reinvest. I am not in preferreds to beat commons, but the past three years I have spanked the S&P pretty good. But it was all by accident.
Interest rate guessing game is impossible. And even then if they do who knows. The long bond is up what 70% from its lows last year in yield, and most of my preferreds are still probably too high.
If I was a long term investor and without my pension I would invest differently. But I sure wouldnt want to. I like buying issues that are near 100% payment certainty and possibly some may never trade again, lol.
Financial experts also suggest no more than the allocation you recommend, too. Of course many things come into play over all this, but they are not "gold mines" that is for sure!

 

[gooddog]

Mulligan & Sunset,

Thanks for the replies. Will look into what you suggested. You two were part of the group that helped me out a few years ago when I first posted on this site as a new member (but long time lurker). Regarding VTI outperforming preferreds, I'm OK with that. A safe 6%/year is fine by me, and when the market does its next tank, it is easy enough to pull 30% or so out of the safe preferreds and dump it into something like TNA and ride it up a bit.

Mulligan, what utilities are you into. I ask, because utilities were a very large part of my investment strategy up until a year or so ago. Just felt they got a bit too expensive relative to historical norms. That said, if there is some prefs out there that are good - all for that.

Thanks again!

 

[Mulligan]

Gooddog, my opinion means nothing, but I dont blame you exiting common stock utes. I never had interests in the commons. If Im investing for yield, by golly, Im gonna get some yield, not 3% from slow to no growth utilities.
Utility preferreds are a dying trade. Few are issued anymore, some get called and not replaced, and the ones left are mostly illiquid. But I highly value them, and Coolius aint far behind, lol.
My personal favorites are AILLL, CNLPL, and CNTHP. I also think ALBMP is a good one to take a flyer on. At $25.58 you do have 6 months call protection here unlike the others (though they have been past call for decades). Alabama Power finances is so strong its parent Southern doesnt even provide financing assistance. They take care of it all on their own. And it shows...AL Power preferreds have a higher Moodys "debt rating" than many of the parent companies bonds.
I own a couple water utilities. Though lower yielding they are gold. Considering they own monopolies and have regulated profits they will pay forever unless people start boycotting the use of water!

 

[Coolius]

+1 on Mulligan's mentions of AILLL, CNLPL & CNTHP.

I have full positions of all three. They are all past call; but, like Mulligan, I feel the likelihood of redemption is low. Note that the redemption price of CNLPL & CNTHP is higher than their $50 par value.

Also have some ALBMP, at average cost basis of $25.42. Last week a seller appeared with several thousands on ask, and ask price has come down over the past several trading sessions, on volume far less than the original ask amount (IIRC, more than 4K shares )

I think the seller has not yet sold all that he wants, and selling pressure should continue, particularly in the light of the gloom & doom we experienced today.

If the price goes down below $25.50, will buy more to make up a full position.

 

[brewer12345]

Interest rate guessing game is impossible. And even then if they do who knows. The long bond is up what 70% from its lows last year in yield, and most of my preferreds are still probably too high.

But the interest rate guessing game is not impossible. The Fed has scajillions of longer term bonds on its balance sheet which to date it has chosen to reinvest cash flows in more of the same. Inflation is picking up and the Fed will have to react. Part of that will be short term rate increases, but eventually they will choose to stop holding down the long end of the curve. That will start with no longer reinvesting portfolio cash flows, and it may end up with actual sales of these bonds into the open market. Guess what that will do to the long end of the curve (and preferred values)?

Sheesh, I need to go sell that small legacy position I have in a leveraged bond CEF.

 

[Running_Man]

But the interest rate guessing game is not impossible. The Fed has scajillions of longer term bonds on its balance sheet which to date it has chosen to reinvest cash flows in more of the same. Inflation is picking up and the Fed will have to react. Part of that will be short term rate increases, but eventually they will choose to stop holding down the long end of the curve. That will start with no longer reinvesting portfolio cash flows, and it may end up with actual sales of these bonds into the open market. Guess what that will do to the long end of the curve (and preferred values)?

Sheesh, I need to go sell that small legacy position I have in a leveraged bond CEF.

Why in the world is it a given that the FED will stop holding the long end of the curve? It is actually possible they will ADD to their position. This guessing game on interest rates has been going on since at least 2006 when at 5 percent the common, and I mean common wisdom was that interest rates had dropped as low as they could go and had nowhere to go but up and anyone buying long term interest rates was a rube who deserved to lose their money. That information then was as wrong as information could be and anyone professing to know what the Federal Reserve is going to do is just guessing because noone predicted what they did and selling bonds at a huge loss is usually not what owners of a bank do if they can.

It is just as likely actually that interest rates yet could turn quite a bit more negative as every single statement made about what our Federal Reserve is going to do has been stated over the last 20 years in regards to the Japan Central Bank and that has been equally impossible to predict.

 

[Mulligan]

Why in the world is it a given that the FED will stop holding the long end of the curve? It is actually possible they will ADD to their position. This guessing game on interest rates has been going on since at least 2006 when at 5 percent the common, and I mean common wisdom was that interest rates had dropped as low as they could go and had nowhere to go but up and anyone buying long term interest rates was a rube who deserved to lose their money. That information then was as wrong as information could be and anyone professing to know what the Federal Reserve is going to do is just guessing because noone predicted what they did and selling bonds at a huge loss is usually not what owners of a bank do if they can.



It is just as likely actually that interest rates yet could turn quite a bit more negative as every single statement made about what our Federal Reserve is going to do has been stated over the last 20 years in regards to the Japan Central Bank and that has been equally impossible to predict.

They yak and yak and yak about normalized long end rate hikes... It was all over in 2013 and rates were to be normalized...Didnt happen... If there was a $1k bet on half of Fed balance sheet on the books 10 years from now, still being there I would take it. They can blow all they want but its all but monetized, they just dont want to admit it. And if they dont...And 10 year goes to 5% (dont hold your breath on that) CNLPL, CNTHP, and AILLL have traded at par then....Yawn... Its the liquid recent issued 4-5% yields that would suffer...Or the crap capitalized company preferreds that will suffer. I dont own crap...well mostly, gotta have some fun.

 

[brewer12345]

They yak and yak and yak about normalized long end rate hikes... It was all over in 2013 and rates were to be normalized...Didnt happen... If there was a $1k bet on half of Fed balance sheet on the books 10 years from now, still being there I would take it. They can blow all they want but its all but monetized, they just dont want to admit it. And if they dont...And 10 year goes to 5% (dont hold your breath on that) CNLPL, CNTHP, and AILLL have traded at par then....Yawn... Its the liquid recent issued 4-5% yields that would suffer...Or the crap capitalized company preferreds that will suffer. I dont own crap...well mostly, gotta have some fun.

You pays your money and you take your chances. It is possible that we could be seeing an inflationary headfake, or perhaps it is for real this time. Perhaps a lot of it depends on whether stimulus spending happens. I am not eager to take extreme risk positions (perpetuities) in front of this stuff.

 

[Mulligan]

But the interest rate guessing game is not impossible. The Fed has scajillions of longer term bonds on its balance sheet which to date it has chosen to reinvest cash flows in more of the same. Inflation is picking up and the Fed will have to react. Part of that will be short term rate increases, but eventually they will choose to stop holding down the long end of the curve. That will start with no longer reinvesting portfolio cash flows, and it may end up with actual sales of these bonds into the open market. Guess what that will do to the long end of the curve (and preferred values)?

Sheesh, I need to go sell that small legacy position I have in a leveraged bond CEF.

I will agree with you on this. I never own leveraged funds. Not my cup of tea. I would be ecstatic if my preferreds dropped. If they drop to a dollar I would then have 600-700% annual dividend payments on all reinvested divis and additional funds I purchase monthly. The income spigot would explode quickly. That would be awesome! My weaker ones have puts and calls on them so they should be fine.
Seriously though for someone with a traditional investing perspective I can see why you have your concerns.

 

[Mulligan]

You pays your money and you take your chances. It is possible that we could be seeing an inflationary headfake, or perhaps it is for real this time. Perhaps a lot of it depends on whether stimulus spending happens. I am not eager to take extreme risk positions (perpetuities) in front of this stuff.

I take my chances with the prices of the stock....Not with the probability of dividend payment. I know CNLPL was $50 when 10 year was over 5% and I know it was $35 when 10 year was 10%. I know the history and tracking mechanisms of the types of securities I own. My pension fund needs to be cognizant of your valid concerns. Me, I can do my own thing. In fact its a great diversifier as they cant buy what I can.
Im just playing around Brewer. Definitely respect your opinion. This is just me, but inflation has to get over 3% for me to pay notice. And we have about hit the 12 month YoY spike in oil. That will be headwinds already going forward to maintain upward inflationary spirals.

 

[Mulligan]

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

You pays your money and you take your chances. It is possible that we could be seeing an inflationary headfake, or perhaps it is for real this time. Perhaps a lot of it depends on whether stimulus spending happens. I am not eager to take extreme risk positions (perpetuities) in front of this stuff.

You will enjoy this Brewer. Kind of shows what I care about stock prices. I bought a preferred today at $132 and it went to zero immediately. I was only able to get 12 shares so I lost $1500 today! Ha, I knew I would though...See a company must trade a 100 share block for price to change. When preferred goes exD it subtracts divi with assumption there will be a next purchase. Except there hasnt been one in 15 years. So the quarterly dividends over this time has dragged the price to $0. So I got 12 shares of a stock with $0 price. There is 788 of them somewhere and I will keep working to get more. The zero price is fine by me since the dividend's security is absolute. Higher interest rates cant drag the price down on this one I own!

 

[brewer12345]

I take my chances with the prices of the stock....Not with the probability of dividend payment. I know CNLPL was $50 when 10 year was over 5% and I know it was $35 when 10 year was 10%. I know the history and tracking mechanisms of the types of securities I own. My pension fund needs to be cognizant of your valid concerns. Me, I can do my own thing. In fact its a great diversifier as they cant buy what I can.
Im just playing around Brewer. Definitely respect your opinion. This is just me, but inflation has to get over 3% for me to pay notice. And we have about hit the 12 month YoY spike in oil. That will be headwinds already going forward to maintain upward inflationary spirals.

Could be that this is an inflationary headfake. Or maybe not. But if we are talking about a 5 or 6% yield on stuff that has very extended duration, I do not consider the risk-reward to be attractive in this environment. YMMV.

 

[Mulligan]

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

Coolius did you get your email to attend the annual Ameren Illinois annual shareholders meeting next month? Are you planning on attending to vote your shares? Preferreds get same voting privelages as the commons. Lets see...Ameren the parent owns all 100% of the 25 million shares of the commons, and 85% of the 700,000 preferreds. Hmm, is it really worth our time to go vote?

 

[Golden sunsets]

I got an email this am telling me that I had a notice from Ameren. I hadn't gone to my brokerage account yet to view the notice. Glad to know that it is not a call notice on AILLL!!!!

 

[Coolius]

I got the annual report, which included an invite to the shareholders meeting in St. Louis, MO.

Unfortunately, since I did so badly in the Beat Boho contest and had to pawn my private jet, I would have to hitchhike all the way from California to Missouri, my thumb cannot take the strain.

But that is in your neck of the woods, so you should go and give 'em hell. Tell them to issue more AILNP & AILLL, with assurances of no call for the next 30 years.

 

[RicDee]

I am ready to make my first purchase
So I want to get it right
From this year’s tax return
25% = My Marginal Tax Rate
16% = Tax as a percentage of taxable income
12.6% = Total Tax divided by Total Income (before deductions)
I am going to buy $100,000 of Preferreds with dividends taxed at 15%
Should I buy them through my Fidelity Traditional IRA, Roth, Regular Brokerage Account or another type of account?
And should I buy 10 Preferreds at $10,000 or 20 at $5,000?
Thanks

 

[Coolius]

Ric, all good questions, but, really, it's only you who can make the decision that best fits your needs and tolerance level.

Wishing you well, that you will make the decisions that let you sleep well at night, no matter what the market does in the short term.

 

[Running_Man]

I am ready to make my first purchase
So I want to get it right
From this year’s tax return
25% = My Marginal Tax Rate
16% = Tax as a percentage of taxable income
12.6% = Total Tax divided by Total Income (before deductions)
I am going to buy $100,000 of Preferreds with dividends taxed at 15%
Should I buy them through my Fidelity Traditional IRA, Roth, Regular Brokerage Account or another type of account?
And should I buy 10 Preferreds at $10,000 or 20 at $5,000?
Thanks

If you are buying preferred taxed at 15% when your marginal rate is 25% it on the surface would make more sense to pay the 15% tax now rather than to defer the gains into retirement, but you should review what your tax situation will look like over the coming years and other needs for the money before you make that decision.

The number of preferred to purchase is totally up to your ability to be able to track investments and ability to understand if you should be selling a particular issue. Personally I think 10 issues is all I would ever want to track as you need to be ahead of the curve on selling if a particular issue would require that, 20 issues would require a lot of work unless you are counting on blind faith on other people, not a great idea in my mind.

Good luck

 

[Mulligan]

Ric when you decide to buy focus on price point. Dont over pay. Be realistic yet patient with ur bids. Illiquids will fleece you on ask prices.