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

[MooreBonds]

A good point. Obviously don't really know how they'd do in that environment. I do know that they "claim" to hedge interest rates for whatever that is worth. It's my understanding that a properly managed mREIT can whether interest rate rises and actually excel if they can maintain variable rate mortgages, much like a BXMT does.

So if they are hedged to a very large degree...then why are their (or other mREITs) earnings fluctuating so wildly that they have such large changes in their dividends? If they are truly hedged, shouldn't their dividends be just ever-so-slowly growing over time?

 

[Mulligan]

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

Pig, for me its all in the context of ones portfolio and needs. My caveat is I have a pension I live on. If it was cut 20% today, it would still cover all my needs (but I wouldnt get to buy new money preferreds nearly as often, lol).
Cap's style is more fundamentally sounder than mine. I have probably over 35% of my money just in Ameren preferreds and basically all of my investment money (not my savings account and gambling stash, lol) is in preferreds. So I am violating 3 financial golden rules already... Class concentration (preferreds), sector concentration (utilities), and company specific concentration.
I dont give a rats arse either... I am sticking to what I am comfortable with. Hell, my 87 year old neighbor for 60 years plus has only had CDs and Union Electric (now Ameren) and that is it. Worked out well for him.
But I own mostly old preferreds that I have tracked through time. I know exactly where they will trade at various rate intervals after the few days of panic settle down. Heck AILLL was issued at par 6.625% when the 10 year was 4.5%. I would be extremely surprised if it traded below par for any extended period of time until 10 year approached 4%. ....And if it did I would sell my other stuff and buy even more, lol.. BTW, I consider this portfolio diversification, as I damn well know my pension manager has none of the stuff I own. But I am a pensioner, not an aristocrat, so my pension is way more important to me long term than my personal money is....If I want to live a long life and not have to work, lol.

 

[MooreBonds]

Curious to know what % of portfolio you all have covered with preferred's (or I guess baby bonds as well)?

Preferreds about 17% of total invested portfolio, with top 2 issuers being 0.5% each, next 2 at 0.4% each, then #5-#25 about 0.25% each.

New contributions and accumulated cash in the tax-advantaged accounts are earmarked mostly for more preferreds. Although, given about half of our retirement income will be my wife's pension, we have a bit more leeway to not be as worried.

We have about 10 years till FIRE, so I also will simply be putting new monies into whatever yields are available over the next 10 years. Of course, with my luck, rates will creep up over the next 8-9 years, then finally revert to the mean in year 10!

 

[pig pile]

So if they are hedged to a very large degree...then why are their (or other mREITs) earnings fluctuating so wildly that they have such large changes in their dividends? If they are truly hedged, shouldn't their dividends be just ever-so-slowly growing over time?

Its just my feeling that if you hedge, you sacrifice future dividend growth rates (or even company growth). Certainly not true 100% of the time. mREITs recognize nobody would invest in them if they did not do this.

Just don't think anyone really knows how they will survive with rate normalization. Hell, all I'm really doing it regurgitating theory, not like I know anything to speak of.

 

[Coolius]

I am in similar situation as Mulligan - except for no pension and rely on investment income to bridge the gap between living expenses and Social Security.

Very overwhelmingly concentrated in Preferred issues, close to 55%, balance in individual corporate bonds and Mutual Funds.

Of that 65%, well over 1/2 are illiquid Utes and financial preferreds.

 

[pig pile]

Pig, for me its all in the context of ones portfolio and needs. My caveat is I have a pension I live on. If it was cut 20% today, it would still cover all my needs (but I wouldnt get to buy new money preferreds nearly as often, lol).
Cap's style is more fundamentally sounder than mine. I have probably over 35% of my money just in Ameren preferreds and basically all of my investment money (not my savings account and gambling stash, lol) is in preferreds. So I am violating 3 financial golden rules already... Class concentration (preferreds), sector concentration (utilities), and company specific concentration.
I dont give a rats arse either... I am sticking to what I am comfortable with. Hell, my 87 year old neighbor for 60 years plus has only had CDs and Union Electric (now Ameren) and that is it. Worked out well for him.
But I own mostly old preferreds that I have tracked through time. I know exactly where they will trade at various rate intervals after the few days of panic settle down. Heck AILLL was issued at par 6.625% when the 10 year was 4.5%. I would be extremely surprised if it traded below par for any extended period of time until 10 year approached 4%. ....And if it did I would sell my other stuff and buy even more, lol.. BTW, I consider this portfolio diversification, as I damn well know my pension manager has none of the stuff I own. But I am a pensioner, not an aristocrat, so my pension is way more important to me long term than my personal money is....If I want to live a long life and not have to work, lol.

Its interesting because you're on very conservative side in terms of what type of preferred you hold, but your risk is in an overabundance in one company. I am exact opposite where my risk is that I have some of those tight sphincter companies but i have no one large holding. For me, I do expect that to change over time as I'm certain favorites will arise.

That is good news on your expectations of AILLL to hold during expected rate rise. This is one I'm definitely looking to acquire more of when opportunity is there.

 

[pig pile]

I am in similar situation as Mulligan - except for no pension and rely on investment income to bridge the gap between living expenses and Social Security.

Very overwhelmingly concentrated in Preferred issues, close to 55%, balance in individual corporate bonds and Mutual Funds.

Of that 65%, well over 1/2 are illiquid Utes and financial preferreds.

Just recently picked up a Ford 10 yr corporate bond. Was my first stab at it. Haven't seen anything as good pop in though lately. Hopefully that changes soon.

 

[Coolius]

Have a bond ladder with bonds maturing every year until 2025.

Not replacing maturing bonds since 2014, as yields were so low then, and still low even now. So been replacing with perpetual preferreds like WFC-L, FIISO & BAC-L, and, of course illiquid Utes.

 

[Mulligan]

Its interesting because you're on very conservative side in terms of what type of preferred you hold, but your risk is in an overabundance in one company. I am exact opposite where my risk is that I have some of those tight sphincter companies but i have no one large holding. For me, I do expect that to change over time as I'm certain favorites will arise.



That is good news on your expectations of AILLL to hold during expected rate rise. This is one I'm definitely looking to acquire more of when opportunity is there.

Its the push-pull thing...There are a few issues that are what I call "yield trapped" to par. If it wasnt past call it would be easily trading $2-$3 bucks higher. But that call risk keeps it within shouting distance of par. If you look at some similar type non callable utes they trade 20-40% above par and yield close to 5%. They have the call protection. Conversely you see some old 4% issues trading fairly close but under par. For safe conservative callable issues that are illiquid they tend to stay within shouting distance either way of par because of the call factor...And it may or may not ever occur. The only real risk I believe I am assuming is call risk. That is the price I pay to juice my yield a bit and stay in safe territory.
When I am getting 70 times coverage of dividend payments with after tax profits from company backed by a regulated monopoly moat, the last thing on my mind when I go to bed is whether I am getting paid or not.
Writers on Seeking Alpha will brag about a safety of an issue with 150% dividend coverage...Big whoop. That is barely covering the divi in my mind...I prefer 700%! Throw in the fact you have these shell holding companies that need the cash from the subsidiaries of the preferreds to pay their debts. And they cant get theirs until I get mine!
Throw in the "trivial" facts the bonds are "A " rated and no preferred payment has ever been missed (and some of the companies issues at going on 90 years old now) these make sleep at night holdings for me.
I would rather have the bulk of my money in something like that that than spreading my money just to spread it in things I do not understand or have more risk. The CLP issues are exactly the same as above. Just have to wait for the idiots to quit bidding them up.

 

[pig pile]

Its the push-pull thing...There are a few issues that are what I call "yield trapped" to par. If it wasnt past call it would be easily trading $2-$3 bucks higher. But that call risk keeps it within shouting distance of par. If you look at some similar type non callable utes they trade 20-40% above par and yield close to 5%. They have the call protection. Conversely you see some old 4% issues trading fairly close but under par. For safe conservative callable issues that are illiquid they tend to stay within shouting distance either way of par because of the call factor...And it may or may not ever occur. The only real risk I believe I am assuming is call risk. That is the price I pay to juice my yield a bit and stay in safe territory.
When I am getting 70 times coverage of dividend payments with after tax profits from company backed by a regulated monopoly moat, the last thing on my mind when I go to bed is whether I am getting paid or not.
Writers on Seeking Alpha will brag about a safety of an issue with 150% dividend coverage...Big whoop. That is barely covering the divi in my mind...I prefer 700%! Throw in the fact you have these shell holding companies that need the cash from the subsidiaries of the preferreds to pay their debts. And they cant get theirs until I get mine!
Throw in the "trivial" facts the bonds are "A " rated and no preferred payment has ever been missed (and some of the companies issues at going on 90 years old now) these make sleep at night holdings for me.
I would rather have the bulk of my money in something like that that than spreading my money just to spread it in things I do not understand or have more risk. The CLP issues are exactly the same as above. Just have to wait for the idiots to quit bidding them up.

I hear you, by no means was i saying one way was better than another. Just an interesting observation. I'm definitely moving to the more safer route in terms of investment grade stuff, only have some yield boosters for just that. Small positions that really won't make a difference if they were to go belly up. It's actually fairly rare for preferred payments to stop entirely. Not never, just rare. mREITs perhaps will give us a look at that rare opportunity as I'm certain not all of them will survive sustained rate hike cycles.

 

[Mulligan]

I am in similar situation as Mulligan - except for no pension and rely on investment income to bridge the gap between living expenses and Social Security.

Very overwhelmingly concentrated in Preferred issues, close to 55%, balance in individual corporate bonds and Mutual Funds.

Of that 65%, well over 1/2 are illiquid Utes and financial preferreds.

This is only my thoughts, so take that for what it is including my biases. But when financial experts say no more than 10-20% of stash in preferreds they are thinking of the typical preferred... The ones you are largely in are not typical. Yours are at a higher level than most by far. Some in fact are safer than many bonds. But they dont know about these types of issues. Never even heard of them. Of course all preferreds will be in various degrees susceptible to long end yield hikes. We know that. If someone doesnt they dont need to buy preferreds. It is what it is as they say..... For my needs, I would rather have 100% of my money in CNLPL for example, than 5% in LTS-A. But it is all up to ones risk level....And Coolius, your risk level isnt above mine, lol.

 

[Mulligan]

I hear you, by no means was i saying one way was better than another. Just an interesting observation. I'm definitely moving to the more safer route in terms of investment grade stuff, only have some yield boosters for just that. Small positions that really won't make a difference if they were to go belly up. It's actually fairly rare for preferred payments to stop entirely. Not never, just rare. mREITs perhaps will give us a look at that rare opportunity as I'm certain not all of them will survive sustained rate hike cycles.

I agree totally with you, Pig. I just like to post out my thoughts so when you read, you can see the biases I have. There is no reason not to believe one owning a chunk of safe bonds and a couple of aggressive preferreds isnt a better method. I just get killed on bond interest income and I have no where to hide them really....And besides...I am a chicken investor... Half my foot in the water...I much rather prefer the 2007 era. When I could get 6% CDs with inflation way under that rate. Banks needed money then so they bid up the CDs to get the cash. If I can ever get 6% CDs and 3% or so inflation, its all going back to the banks, lol!

 

[pig pile]

I agree totally with you, Pig. I just like to post out my thoughts so when you read, you can see the biases I have. There is no reason not to believe one owning a chunk of safe bonds and a couple of aggressive preferreds isnt a better method. I just get killed on bond interest income and I have no where to hide them really....And besides...I am a chicken investor... Half my foot in the water...I much rather prefer the 2007 era. When I could get 6% CDs with inflation way under that rate. Banks needed money then so they bid up the CDs to get the cash. If I can ever get 6% CDs and 3% or so inflation, its all going back to the banks, lol!

My grandfather made a deal with his local bank once. He gave them 250K to keep in a non-interest bearing account because he didn't even trust the bank, nor the Government guarantee!!! He made a deal with them that the bank couldn't touch it nor would they be responsible for paying interest on it. Not even sure you could really do that. He knew the bank manager though, so I guess they made some agreement. Signed in the presence of lawyers no less, lol.

What did he live off of? Preferred stock paying 11% and SS. For the life of me I cannot remember the name of the preferred. He had 200K in it, just one company. Marathon Oil maybe. For some reason that one came to mind. The money it paid, he said, was 3X his best ever year as a farmer. Different times.

 

[Mulligan]

Good stuff, PP....And the old timers were way better at stretching a nickel than I am. They didnt waste as much money eating out as I do either. My dad is so tight he doesnt even spend their entire SS checks. But he would tell you he has everything he needs so there isnt any reason to just waste the money.

 

[RicDee]

I bought my first preferred a month ago and have been reading the postings and waiting patiently for prices to come down to buy more.
My situation and risk level (less the flipping) is similar to Mulligan’s
Are there any of your “Buy and Hold Forever” preferreds that you think are okay to buy now?

 

[MooreBonds]

I bought my first preferred a month ago and have been reading the postings and waiting patiently for prices to come down to buy more.
My situation and risk level (less the flipping) is similar to Mulligan’s
Are there any of your “Buy and Hold Forever” preferreds that you think are okay to buy now?

It's not a question of credit quality - it's a question of what return you are comfortable with holding (potentially) forever. There are a number of baby bonds from mostly BDCs with maturities in 3-10 years that offer a good mix with some perpetual preferreds (or various bonds that have such a long maturity date as to essentially be like perpetual bonds).

As Mulligan occasionally points out, some of these illiquid preferreds have had similar yields for decades, both when treasury yields were where they are now, and well above where they were now...something I just can't understand for the life of me. So obviously someone (most likely insurance companies and pension funds) has a willingness to hold some amount of lower yielding preferreds as part of their portfolio.

As a small % of your total preferred holdings, it could make sense to add one or two now, but I wouldn't advocate going all-in now.

 

[Mulligan]

Ric, I agree with Moorebonds. I dont see a major problem with your present course of watchful waiting. Especially with the intent to hold indefinitely. If you are holding a perpetual just for income, one probably should separate the price from the income and accept your fate unless you want to trade. Take CNLPL... Trades at $55 right now and a 5.9% yield. Actually very acceptable in terms of yield and strength of company as of current interest rate environment. Its the amount over par, past call that is too high. If somehow you could get in a $54 before June 6, you essentially are in at $53 which is only a $1.16 above call and a plus 6% perpetual yield... Not bad for a safe issue... As Moorebonds alluded too here is your historical reference for pricing... In 2004 with normalized rates and 10 year around 4% , it traded right at par $50 most of time...In 5%-6% 10 year era from a couple decades ago, you are looking at the low $40s. I am not worried about a 6% 10 year for time being. But yes I have 5 or 6 issues I will never sell. Some cannot be called others can, so it is in their hands not mine as I wont sell the core holdings. Preferreds are at a premium as a general rule for the quality ones. I doubt you miss a run up (they really never run up anyways) by waiting a bit or gently tip toeing in.

 

[Mulligan]

Ric, I finished mowing the grass and will finish my thoughts before I head off for a sunday margarita with my GF..... Your specific question was about whether my preferreds had any good deals... At this point it is really only about "fair deals" and not getting screwed on a bid/ask... AILLL is $26.50... 6.25%.... Great yield for great safety... But you are paying 6% premium to call price. Can you accept that? It has been callable for 20 years and 13 since Ameren acquired it. I bought 300 more last week but I have been in it for almost 4 hears though. I wouldnt have a problem if all my money was in it, but that is just me and my situation.. DMRRP I bought 100 at $73.... Is that a good price? I dunno...Last 4 years only 5 blocks of 100 shares have occurred... $73 $73,$73,$75,$70 have been it. I was getting pressured from behind quickly and a rare ask of $73 was there so I paid up $3 from what I wanted or risk losing it for another year. BURCP, I just flat got lucky at $48.50. Dont know why as I tried the week before at $52 and no action despite same $55 bid. There may be a world of "safe safe" preferreds, but I dont scour off the deep end of companies to look for them as far as looking at mysterious companies. I like basic companies with easy to read balance sheets, producing something of value. Yep, Im a dinosaur. Utilities are the safest in my mind until they lose their monopoly status or everybody goes off the grid.

 

[Coolius]

Like Mulligan, I do not expect to sell illiquid utes, and do not mind buying at "higher" prices as long as there is reasonable confidence the issue will not be called before I offset the over-par premium via dividends.

For example, AILLL was acquired over several buys, the lowest being $25.85, and the highest $26.70. HE-U bought from $25.80 - $27.00.

Flipping is done if there is an unusual spike in price, with full intention of buying back. This has sometimes not played out well, admittedly. So risk of losing the stock is definitely to be considered.

 

[Mulligan]

Ric, you may consider GBLIL. Allowing for accrual of interest payment and going exD in 6 weeks, you are getting something essentially at par 7.75%, with a decent rating. I have about 500 shares which is a decent amount for me. I bought pre IPO thinking it as a flip, but I have to hold now as the yield is just too good to give up.
FOR IMMEDIATE RELEASE

OLDWICK - MARCH 20, 2017
A.M. Best has assigned a Long-Term Issuer Credit Rating of “bbb” to the newly created Global Indemnity Limited (Global Indemnity) (Cayman Islands) [NASDAQ: GBLI], replacing Global Indemnity Unlimited Company (Global Unlimited) (Dublin, Ireland) as the ultimate parent of Global Indemnity Reinsurance Company Ltd. and its U.S. subsidiaries. A.M. Best also has assigned a Long-Term Issue Credit Rating (Long-Term IR) of “bbb-” to the $120 million 7.875% subordinated notes due 2047; and $100 million 7.75% subordinated notes due 2045 of Global Indemnity. Additionally, A.M. Best has assigned indicative Long-Term IRs of “bbb” to senior unsecured debt, “bbb-” to subordinated debt and “bb+” to the preferred stock of Global Indemnity’s shelf registration. The outlook assigned to these Credit Ratings (ratings) is stable. All remaining ratings of Global Indemnity and its subsidiaries are unchanged.

 

[Coolius]

I am also invested in GBLIL, but to a far lesser extent than illiquid utes.

In July, there will be a payment for 4 months of accumulated dividend since IPO. Approximately $0.64.

Anyone buying GBLIL now @ $25.13 will have a net cost basis below par if held through this event. Call risk will then take a back seat to company risk.

I intend to buy more if it dips to $25.10.

 

[Sunset]

Well you folks made me nervous about NLY.
I had just recently bought it days ago, and after everyone talked about the interest cross over issue, I figured I should sell.
So I made a net profit of $34 in a few days.

Now I have to find something else to buy..

 

[Mulligan]

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

Well you folks made me nervous about NLY.
I had just recently bought it days ago, and after everyone talked about the interest cross over issue, I figured I should sell.
So I made a net profit of $34 in a few days.

Now I have to find something else to buy..

Sunset, Moorebonds knows more about this stuff, so dont let my negative rants sway you either way on these. Im an oddball investor...And my number 1 rule in investing is....If I am going to lose money on an investment, I damn sure want to understand and explain why I lost money. I cant comprehend the true mechanisms, leverage, and derivatives of these Mreits. So I stay away...Now in reality, I am violating that rule by owning bank preferreds. But usually if a bank goes under the reason would be fairly obvious. Mreits may at times be the best investment out there. I will never know because I am not willing to buy them though.

 

[capjak]

Mull has does this one work? GBLIL.

 

[Mulligan]

Mull has does this one work? GBLIL.

Sorry, Cap..Not following your question.