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

[Mulligan]

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]

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

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]

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]

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]

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]

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]

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

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]

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]

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

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]

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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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.

 

[Mulligan]

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

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.

That is the dance I am doing...I bought a few "lower yielders". And my CTWSO and CTWSP are flat out untouchable despite being close to 5% yielders. They are impossible to buy and almost complete guarantee payment forever. But I dont want to make a living owning all of my money in these as cap losses could be huge if rates ever spike.
That is an example of why I loaded up on PVTBP and PFK. Absolutely nothing to lose on PVTBP and 9.5% yearly gain potential, plus a flip opportunity down the road will be there... PFK, Im just taking my 2.5% plus monthly CPI, until mandatory call in April 2018. I know I will make some money with this, sleep at night issue, and maybe at that something more appealing will present itself. I know exactly where I stand here. But like any issue, if an idiot bid comes out, I will sell.

We could easily find ourselves in a 1940s situation where inflation runs considerably higher than bonds yield though. Many are not aware this can happen.

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[Slow But Steady]

How about some GOODO?

Monthly dividend of $0.156 goes ex this Friday. Price is a bit less than three months divi over call. Seems like they were flirting with calling this one and decided not to.

Any comments?

 

[Mulligan]

How about some GOODO?

Monthly dividend of $0.156 goes ex this Friday. Price is a bit less than three months divi over call. Seems like they were flirting with calling this one and decided not to.

Any comments?

The issue they were trying to call was the mandatory 1/2017 call GOODN. The underwriters met this new issue with such underwhelming enthusiasm they could only bring $25 million to market and still cant completely call N which is a $35 million issue...Pretty pitiful. So I would say GOODO is not yield trapped and its yield is what its worth. They are not the most strongly capitalized company. It may be fine..I held for about a month and sold on 30 cents profit per share. Not ever reconsidering going back to it.


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[Mulligan]

Slow, it looks like you are wanting to get something near 7%. While my original investing in preferreds started there a few years ago, price appreciation has taken me away from that area, so I have little understanding of these issues and companies strength. One must have some faith or understand "the books" better than I do.
The only ones I own in that area and above are PVTBP, SIVBO, OSBCP, and AILNP (which is not buyable). The reason why I loaded up on PVTBP so much is a slew of accountants dug into the books and determined it was worth buying out at a huge premium than the then current stock price was. Way smarter than me, so I take the call risk to chase yield which almost apparently isnt on the radar based in recent CEO comments and SEC filings.
I think CVB has strong merit at right price also. I dont own any now as I sold most peripheries to make the easy money on BGLEN, then have used some of that to buy the PVTBP. But if any tax deferred money becomes available I will revisit it again.


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[aja8888]

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.

Wait until the general market takes a 5 - 10% breather then you can pick up the preferreds at lower prices. I do that with CHSCM.

 

[Mulligan]

Well after some pondering last few days, I decided I was getting a bit too chummy with the low yielding issues. Capital preservation rates about on equal terms with yield so I get caught in the middle sometimes. But the bottom line is I keep coming back to "reach for safe yield above par and accept the call risk, but look to dine and dash when needed".
So I sold off CRLKP, HAWEL,and PFK for some quick profits, and bought 1200 shares of CVB and more PVTBP. Have almost 2000 shares of PVTBP. It has moved into the 2 spot a distant second to Amerens. CVB, I have owned a few times. It is noncallable BBB- rated and a 7.19% yield. I had to dump them several weeks ago when I was rounding up any loose buck to secure the easy BGLEN score. Had to buy 6 cents higher than last owned, but made $4 a share on the "borrowed money" with no divi missed... No regrets there.....Didnt want to sell PFK, but when you collect a dividend and 45 cents run up on a term called issue a year in a half away that is now 70 cents above par on a 2.5% base yield, you have to lock in the profits and leave.


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[alaska55]

Mulligan where does Kmi announce news such as distribution dates. I know it's 3/1 and 9/1 but where can I find the official news announcements for CVB.

 

[Mulligan]

Mulligan where does Kmi announce news such as distribution dates. I know it's 3/1 and 9/1 but where can I find the official news announcements for CVB.

http://www.nasdaq.com/symbol/cvb/dividend-history

Here is a link Alaska. It appears it will be declared in mid August. Here is the confusion problem with the issue. KMI has nothing to do with it. Its technically Lehman ABS Trust Certificates. Lehman bought a chunk of KMI's subordinated debt (when it wasn't even named KMI, too actually) back when the debt was issued and repackaged it into a $10 retail investment. They served as the trustees, KMI sends dividend to Lehman, then Lehman then passes on dividend to you as a certificate holder of the trust. And of course Lehman went belly up years ago, so US Bank took over the trust and now passes on the income to you.
Some of these older issues have an interesting history behind them.


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[Sunset]

Well after some pondering last few days, I decided I was getting a bit too chummy with the low yielding issues. Capital preservation rates about on equal terms with yield so I get caught in the middle sometimes. But the bottom line is I keep coming back to "reach for safe yield above par and accept the call risk, but look to dine and dash when needed".
So I sold off CRLKP, HAWEL,and PFK for some quick profits, and bought 1200 shares of CVB and more PVTBP. Have almost 2000 shares of PVTBP. It has moved into the 2 spot a distant second to Amerens. CVB, I have owned a few times. It is noncallable BBB- rated and a 7.19% yield. I had to dump them several weeks ago when I was rounding up any loose buck to secure the easy BGLEN score. Had to buy 6 cents higher than last owned, but made $4 a share on the "borrowed money" with no divi missed... No regrets there........

Would you be willing to share what you paid for CVB and PVTBP
I look at the prices and worry that I'm missing something that would cause me to lose $$$ quickly.

 

[Coolius]

Lehman ABS Corporation (CVB) Dividend Date & History - NASDAQ.com

Here is a link Alaska. It appears it will be declared in mid August. Here is the confusion problem with the issue. KMI has nothing to do with it. Its technically Lehman ABS Trust Certificates. Lehman bought a chunk of KMI's subordinated debt (when it wasn't even named KMI, too actually) back when the debt was issued and repackaged it into a $10 retail investment. They served as the trustees, KMI sends dividend to Lehman, then Lehman then passes on dividend to you as a certificate holder of the trust. And of course Lehman went belly up years ago, so US Bank took over the trust and now passes on the income to you.
Some of these older issues have an interesting history behind them.


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What would happen if KMI defaulted on the payments? Would US Bank be obligated to make the certificate holders whole?

I believe that US Bank is a strong company, but the question here is whether they have any responsibilities for maintaining the payments.