Preferred or not preferred

[lja0703]

Hey guys need some advice. I am 58 and have been retired for 2 years. I am pretty heavy(50%) into preferred stocks, paying from 5 -8 % dividends. They have been doing as advertised the last 2 years. Now with the threat of interest rates creeping back up should I have concern with my overexposure of preferred stocks? Really like the dividends they produce. Any thoughts, comments would be appreciated.

 

[2B]

Preferred stocks are sorta like bonds but you know that already. They are typically at the bottom of the line should the company have financial problems. During the financial crisis, many financial preferred stocks died. Fannie and Freddie are the poster-children for this. Some suspended payment I believe. The market for preferred stocks also just about froze completely up. Many of the preferred closed end funds became illiquid for awhile. Even though interest rates plummeted they went down in value for an extended period.

All things being equal, preferred stocks (and preferred funds) will behave like bonds as interest rates rise. Since many have no defined maturity, the valuation moves could be extreme.

Personally, I wouldn't put 50% of my assets into preferred stocks or funds or even 50% of my fixed income allocation. To each his own. So go with whatever you are comfortable with.

 

[aja8888]

As mentioned by 2B, one must choose preferred stocks carefully. Those with call features and from good companies can do quite nicely in a portfolio and act like bonds. Here's one I own a little of:

https://www.google.com/finance?q=NASDAQ%3ACHSCM&ei=E6myVMnqKIi-sgfFsYHQDw

Note: The company (CHS, Inc.) does not issue common stock, only callable preferred.

 

[Mulligan]

I have begun to find these interesting investments for my needs. Though to some they are considered "the worst of both worlds" when compared to stocks and bonds. How safe are your preferreds? Cumulative? How is the underlying company doing? Does it even matter if the price goes down as long as you are clipping the coupons quarterly? Some of my recent preferreds I compared the price of it today to back in 2006 of the 4% 10 year note era and found them to right in the same range as they are today. The spreads between preferreds and govt bonds is historically high so that MAY serve as a buffer. Then again if short rates are raised it may protect the long end, too. I don't know. The preferreds I have bought I tracked them with their price the past 25 years, and no surprise here, they went up when rates went down, and they went down when rates went up, but generally in a narrower track.
2B brings up a good point back in 2008. Most took jolts like the market did, but as long as the company was good, they continued paying. A lot of the $25 par stocks dropped to 17-18 for a bit and some of the bank ones dropped under $10. A person could have made a killing in Bank of America preferreds then as some of them dipped to around $8 and they never did miss a payment and have subsequently recovered. I probably would have been one of those who wet my pants and sold at $8, but it would have been pretty sweet to have bought 7.125% BofA $25 par at $8 and still today collecting the dividends today from that!


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[Texas Proud]

One of the things that I would check before buying any preferred is that is is cumulative...

If a company gets into financial difficulty, they will stop paying 'dividends' on the preferred before they stop paying on bonds.... if the preferred is not cumulative, they do not have to pay this dividend ever... you just lose... with cumulative, they will eventually have to pay it before starting to pay dividends to common shareholders...

It could be big money if they do not pay for a number of years....



Also, the price of preferred does not always track bonds (interest rates).... there is that kicker of being able to buy common stock at a set price which has some value all the time.... if the preferred is 'in the money' then it tracks the common stock price and not interest rates...

 

[clifp]

I've owned preferred in the past, but I wouldn't right now, especially since in most case preferred are trading above par. If interest rates raise they will fall like rock. If interest rates fall (I guess possible in a deflationary environment) then they'll often be called in a few years and your actually yield will be lower than your current yield.

Finally in most case preferred stock is taxed at ordinary income levels. I'd think you general you'd be better off with the common and collecting the rising dividends of the common. That said I am sure there are some decent preferred stock offerings out there.

 

[foxfirev5]

I've had them in the past but realize their short comings. When stocks go up they go up - somewhat. When stocks tank - they tank. I own stocks for the ride and bonds/CD's/cash for ballast.

 

[Mulligan]

I've owned preferred in the past, but I wouldn't right now, especially since in most case preferred are trading above par. If interest rates raise they will fall like rock. If interest rates fall (I guess possible in a deflationary environment) then they'll often be called in a few years and your actually yield will be lower than your current yield.

Finally in most case preferred stock is taxed at ordinary income levels. I'd think you general you'd be better off with the common and collecting the rising dividends of the common. That said I am sure there are some decent preferred stock offerings out there.

I agree clifp that there are "no screaming bargains" and each individuals situation comes into play. Buying under par is not a big concern to me as there are many 15% tax prefereds of investment quality significantly before par, some of them issued in the 1940s. The trouble is some of them are paying 4.5% - 5% and I have no interest in them as they probably will never be called as the above rates are the below par current rate not the higher par call rate. So I sniff around on the ones right above par, but have announced next payout thus immediately negating any risk of principle loss.
Several investment grade utility preferreds can be had for over 6% but yes there is a danger of a call, but if they do I am not out any money for the risk. For my situation I am content if price drops and continue collective the 15% tax rate dividend. Even if rates rise and price drops I find it hard to imagine in the coming years the 10 or 30 year eclipse 6%, so my dividend will still be more.
In fact I will just use that opportunity to buy more at the higher rate. Of course I am not even getting into the discussion of sector concentration or the illiquidity. Many of mine do not trade a share for weeks at a time.


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[aja8888]

Finally in most case preferred stock is taxed at ordinary income levels. I'd think you general you'd be better off with the common and collecting the rising dividends of the common. That said I am sure there are some decent preferred stock offerings out there.

My RMD pulls are taxed at ordinary income levels too, and that's where my small percentage of preferred stock is held. I look at them as part of my fixed income portion of the IRA.

 

[Winemaker]

I have owned preferreds since 2005. They do act/react like a bond, I use them for about 25% of my fixed income portfolio. I always buy preferreds below their "par value" and only in <$5,000 in a single issue. I have been extremely fortunate in this approach in terms of appreciation and +6.00% yields. I have been burned twice: once in Freddy Mac and the other in GM but those were purchased in my taxable "speculation" account, so I was able to use the losses on my return. I also own PGX and PFF etfs and have been satisfied here ,too, but just wish the expense ratio was lower. I created my own etf and I am up 3% since October.




Sipping a 2007 Lake Erie Cream Sherry from Johnson Estates.

 

[BUM]

As mentioned by 2B, one must choose preferred stocks carefully. Those with call features and from good companies can do quite nicely in a portfolio and act like bonds. Here's one I own a little of:

https://www.google.com/finance?q=NASDAQ:CHSCM&ei=E6myVMnqKIi-sgfFsYHQDw

Note: The company (CHS, Inc.) does not issue common stock, only callable preferred.

Small world! I own this too. Been watching it for a while. I wanted exposure to this sector - ag/food. Caught it under $25. So far so god. Not a lot of investor info on the CHS site.

 

[aja8888]

Small world! I own this too. Been watching it for a while. I wanted exposure to this sector - ag/food. Caught it under $25. So far so god. Not a lot of investor info on the CHS site.

They look a pretty successful farming cooperative and hopefully will continue to be that way.

 

[Mulligan]

Small world! I own this too. Been watching it for a while. I wanted exposure to this sector - ag/food. Caught it under $25. So far so god. Not a lot of investor info on the CHS site.

This is my second biggest preferred ,CHSCL, and yes it has done very good. I bought this for income, but it is up almost $1.50 from when I bought it. A juicy 7% plus dividend. My biggest preferred CNLPL appears to have jumped almost $5 today which is crazy for a 50 year old preferred. Of course it was on about 1,000 shares traded which is high for this issue.


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[BUM]

They look a pretty successful farming cooperative and hopefully will continue to be that way.

I'm in for the long haul. Don't expect a killing just a decent ROI.

 

[Mulligan]

I'm in for the long haul. Don't expect a killing just a decent ROI.

They are using this money to help finance building a $3 billion fertilizer plant. CHS I believe is the biggest wholesaler of fertilizer products to farmers. They appear to be ready to cut out the middleman to produce and sell it. They will be taking advantage of cheap nearby natural gas and can truck the fertilizer from site to nearby farmers taking advantage of the northern migration of crop production. Their profit coverage of interest payments is very strong. I look forward to clipping this 7.5% coupon for the next 10 years.


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[Sunset]

I have tried to follow along, hoping to learn the secrets to life but every time I try to look up the stock by google search, it comes up with similar, but not quite right looking quotes.

Are my searches bad, or is there a really good place to look at these stock quotes for a bunch of them ?

 

[alaska55]

Try this

The Yield Hunter | Let's make some money and sleep well at night

 

[lja0703]

Try this

The Yield Hunter | Let's make some money and sleep well at night

Great site

 

[Mulligan]

This one from Fidelity, you can play around with to select your criteria. I like it better than Yield Hunter only because Fidelity picks up the Preferreds that have been delisted but are still investment grade stocks such as issues from Baltimore Gas and Electric, Ameren, and Connecticut Light and Power.

https://research2.fidelity.com/fide...EaXZkWWllbGQiLCJDdW11bGF0aXZlSW5kaWNhdG9yIl19


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[Mulligan]

I have tried to follow along, hoping to learn the secrets to life but every time I try to look up the stock by google search, it comes up with similar, but not quite right looking quotes.

Are my searches bad, or is there a really good place to look at these stock quotes for a bunch of them ?

Keep in mind Sunset there are no uniform codes to preferred's so it isn't your lack of understanding. Depending on who you trade with the same preferred can have multiple symbols. For example take a Merril Lynch preferred. It can show up as MERE, MER/PE, MER-E, MER_PE. Crazy stuff...


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