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

[Mulligan]

My buy-and-hold list may be extensive...but if you look at your trading history over the past 12 months, you'll have far more transactions in more ticker symbols than my spreadsheet has holdings!

Confession Moorebonds...My SPLP-A wasnt bought with created money....I sold my JCP debt issue for a 20 cent profit, ha! I cant stand their debt load and they wont be doing much this year to improve it with no forecasted growth. Targets results didnt help either. Retail is tough and JCP is not going to grow its way out of this...Bottom line...Im just too chicken to hold.

 

[bmcgonig]

Nice explanation of preferreds here and a deep dive into WFC-L and BAC-L. And why those two in particular are so attractive.

I found it very interesting as I'm not as familiar as most people here with preferreds

http://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

 

[Mulligan]

Nice explanation of preferreds here and a deep dive into WFC-L and BAC-L. And why those two in particular are so attractive.

I found it very interesting as I'm not as familiar as most people here with preferreds

http://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

That is an excellent primer article, BMC! One should read that article a few times in trying to understand preferreds before investing in them.

 

[Coolius]

Appreciate the link to the article, BMC.

As a holder of both WFC-L & BAC-L, it's nice to have a little confirmation bias now and then.

 

[Winemaker]

Monmouth Real Estate 7.875% PFRD B will be called soon, paid from the proceeds from PFRD C 6.125% in new offer, announced today.

 

[BrianB]

AES Preferred "C" and 1099-OID

Hi everyone! I've been following this thread for several months. I've learned so much, and have started to pick up some preferred shares as part of my dividend account. I plan to buy and hold till called. One of these has raised an issue that I don't understand and can't find a clear answer to. This is kind of a long entry, but I want to include all pertinent information. Here goes:

08/29/2016: Purchased 200 shares of AES-C at $50.10 plus $7.95 commission = $10027.95 total cost.

10/17/2016: Received first $168.75 interest payment

01/16/2017: Received second $168.75 interest payment ….. so far, so good!

Now I have received my 2016 tax forms 1099 from Fido. Included was a 1099-OID ("Original Issue Discount") from AES showing $225.00 of income in 2016 as OID. This was the only income showing from AES (no entry in the dividend or interest sections). When I imported this into Turbotax it shows up as regular income.

From Quantum Online's entry on AES-C:

"Because the issuer has the right to extend the interest payment period for an Extension Period of up to 20 consecutive quarterly interest periods on various occasions, the junior subordinated debt trust securities will be treated as issued with "original issue discount" for United States federal income tax purposes. As a result, holders of preferred securities will be required to include their pro rata share of original issue discount in gross income as it accrues for United States federal income tax purposes in advance of the receipt of cash. Generally, all of a securityholder's taxable interest income with respect to the junior subordinated debt trust securities will be accounted for as "original issue discount" and actual distributions of stated interest will not be separately reported as taxable income. See "ACCRUAL OF ORIGINAL ISSUE DISCOUNT" on page S-39 of the prospectus for further details."

From that page of the Edgar prospectus listing for AES-C:

"The Preferred Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder who disposes of its Preferred Securities between record dates for payments of distributions thereon will nevertheless be required to include accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition in income as OID, and to add such amount to its adjusted tax basis in its pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. Accordingly, such a holder will recognize a capital loss to the extent the selling price (which may not fully reflect the value of accrued but unpaid interest) is less than the holder's adjusted tax basis (which will include accrued but unpaid interest). Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes."

I like to think of myself as intelligent, but I don't really understand a) why securities on the secondary market have OID, and b) how the amount of $225.00 was derived, and c) is this a common problem I should watch for in the future when evaluating preferred issues.

Fido hasn't been able to help. Can anyone here explain this in regular English?

BrianB

 

[Winemaker]

Since the shares are also debt securities, interest is paid instead of dividends, and the interest accrues daily like a bond. When you purchased the shares on 8/29, you purchased not only the shares but the accrued unpaid interest from 7/15, which was the previous ex-dividend date. Now you shouldn't get taxed on the accrued interest you paid for when you bought AES-C, so they give you the original issue discount back to the ex-dividend date. Now if you sell AES-C between ex dividend dates, the opposite will be true. Part of the price you receive will be accrued interest, and your selling price may be adjusted. As the disclaimer on Quantum says, if you happen to sell at loss, you cannot claim a taxable loss, because your basis was adjusted by the OID you received.

 

[BrianB]

Winemaker, I think I see where you are coming from. Per Fido, the cost basis of my shares increased from $10027.95 to $10122.48. That is an increase of $94.53. Since I actually received $168.75 interest but show a taxable income of $225.00 the additional $56.25 could be the daily interest from purchase to next interest payment date. I will get that back when I sell or when the issue is called.
Whew! This is complicated! The takeaway I get is:
1. Buy as close to (but just after) the Ex-div date as possible, and
2. Keep these in a taxable account as the basis is useless in a Roth or tIRA, and
3. Buy issues that don't use OID whenever possible!

I will just keep on learning...

 

[Mulligan]

Interesting Brian. Being of dull brain I wondered why I did not have this problem and it was because my AES-C was in my Roth. All that tax deferral info for trust debentures I thought was only applicable if a deferral actually occurred .

 

[Mulligan]

Found out this weekend I could avoid the $1,000 UBTI on K-1 by holding additional shares in a separate account, so I bought 500 more units of SPLP-A. Brings me to a 1000. Plan on just holding these. For the 3 year put and 9 year redemption. Mechanically, by far this is my favorite issue to own.

 

[BrianB]

Mulligan, you appear to be correct. My takeaway #2 should read: " Keep these in a taxable account (to benefit from the increased basis) or Roth (where basis is meaningless) as the basis is useless in a traditional IRA, ..."

 

[Mulligan]

Been a bit since I posted. Tweaked things a bit to amuse myself. I bought today 320 shares of CNIGP (A natural gas and electric regulated utility out of Ny/Pa) . It is a 4.8% $20.75 par I bought at $21. You can convert the issue to common shares at 1 to 1 ratio anytime and has a 2026 mandatory put at $20.75 cash payment if you never convert. So basically you get to watch the common CNIG move and convert if it goes over $21, but have the backside put as protection with cash payout if things go to hell.
So my scorecard now is AILNP, AILLL, CFC-B, FIISO, CNLPL, CNTHP, CTWSO,MHO-A, SPLP-A, CNIGO, CNIGP, and UBP-F. I have kind of loaded up on CFC-B last couple months. It is my number 2 issue behind my Amerens. I have kind of bought up and concentrated my holdings a bit.

 

[Coolius]

Nice to see our Income and Preferred issues catching some wind behind their sails.

If this is what it's like even with the knowledge that Yellen & her Merry Men will push 2, maybe 3 more hikes before year end, we could see even higher prices should the economy sputter and they decide to skip one or more hikes.

All this week I was trying to buy more WFC-L and BAC-L, but greed kept my bids too low, and I missed the bottom of both. Oh well, there may be - no, there WILL be - future opportunities to do so.

 

[RE2Boys]

Anyone looked at PFXF? Yields almost 6%, diversified away from financials, but the managing company isn't very free with more detailed info imho.

 

[Winemaker]

No PFXF, but I have owned CPXCX since 2008. Expenses were waived for several years.

 

[Mulligan]

Anyone looked at PFXF? Yields almost 6%, diversified away from financials, but the managing company isn't very free with more detailed info imho.

Its current yield is 5.77%. If one wanted skin in the game, but didnt want to purchase individual securities one could do worse than owning this and a slice of PFF to go with it. More aggressive investors (which I am not ) can buy preferred funds that have a higher yield because they will use leverage.....And this is just my opinion but I prefer to buy my own. But overall my yield is 6.89% which is almost 20% more yield, and my issues overall are safer.
But the negatives are I am more concentrated, more illiquid, and more call exposed also.
There are a lot of good preferreds available over 6%. PFXF clips purchasers with .40% expense fees, so subtract that out and it would be over 6% also. For a fund however, .40% in fees (at present) is reasonable for a fund of this type though.

 

[RicDee]

You guys are terrific

You guys are terrific,

I’ve learned more about Preferred from you than anyone else
I have been reading your posts for months and took Mulligan’s advice and read A Value Opportunity in Preferred Stocks | PHILOSOPHICAL ECONOMICS and learned about WFC-L and BAC-L
I know I have a lot more to learn, but you have given me the confidence to buy my first two Preferreds
My plan is to have 10% of my portfolio with 10 different Preferreds yielding around 6% for the long term. I am thinking that the first two will be WFC-L and BAC-L

What do you think?

Thanks
Ric Dee

 

[Running_Man]

I see those two as a good strategic income addition to a portfolio at 2% of the total portfolio that will provide 6% income on cost for a long time

 

[Coolius]

You guys are terrific,

I’ve learned more about Preferred from you than anyone else
I have been reading your posts for months and took Mulligan’s advice and read A Value Opportunity in Preferred Stocks | PHILOSOPHICAL ECONOMICS and learned about WFC-L and BAC-L
I know I have a lot more to learn, but you have given me the confidence to buy my first two Preferreds
My plan is to have 10% of my portfolio with 10 different Preferreds yielding around 6% for the long term. I am thinking that the first two will be WFC-L and BAC-L

What do you think?

Thanks
Ric Dee

Glad to have you join us, Ric.

I have held WFC-L and BAC-L for a while now. Big mistake when I sold off most of my holdings late last year. But I'm accumulating again - this time will resist urge to sell ( but buy more instead ) at the next dip.

Look at MTB-. This is callable in Nov 2018, but has a yield of about 6%, and a good rating. It is very illiquid, and difficult to get. But worth keeping an eye on. If the price dips to $1,020 and below, a good opportunity to get a few shares. I own a handful, bought at $1,019.

 

[Winemaker]

Welcome Ric! Just be prepared to catch some arrows and an occasional javelin!

 

[Mulligan]

Welcome Ric! Just be prepared to catch some arrows and an occasional javelin!

Hopefully Winemaker you mean the stocks and not us forum members.
My only suggestions Ric would be as you look to purchase more consider diversifying the sectors from which you purchase. Prices will always be interest rate sensitive but avoiding too much in one sector is prudent. And remember you are investing for long term income not cap gains. You will need a rate shock or individual company financial scare to dive in on cap gains from preferreds. Welcome to our little club and stay with us!

 

[gooddog]

Couple of questions for the seasoned preferred buyers

Hi,

Been a lurker on this thread for quite some time. As with all threads on this site the amount of knowledge here is remarkable (as well as the common sense). I'm looking to change my investment strategy (to a safer type of investing) and have a couple of questions.

1) Noticed a few pages back in this thread a very brief discussion of preferred interest/dividends in relation to traditional IRAs. Does anyone have information on the tax consequences of buying preferreds in IRAs, as well as ROTHs?

2) Have noticed that $5k seems to be a sort of limit on how much some posters on the board are putting into each preferred. If you were to break it down to a % of total holdings, what would you put the % into each at? Was thinking 5% into each holding would be a good number, but that could exceed $5k.

Thank you!

 

[Coolius]

Welcome, gooddog. Hope you find this thread useful and profitable.

My guess at one reason for having REITs and REIT preferreds in tax deferred accounts is because mostly their dividends are not QDI ( qualified ).

Other types such as financial preferreds may or may not be QDI. QuantumOnline is a good site where one can determine if a particular issue's dividends are QDI or not.

This is just my opinion, which may be completely wrong. Not the first time, and definitely not the last !

 

[Winemaker]

Hi,

Been a lurker on this thread for quite some time. As with all threads on this site the amount of knowledge here is remarkable (as well as the common sense). I'm looking to change my investment strategy (to a safer type of investing) and have a couple of questions.

1) Noticed a few pages back in this thread a very brief discussion of preferred interest/dividends in relation to traditional IRAs. Does anyone have information on the tax consequences of buying preferreds in IRAs, as well as ROTHs?

2) Have noticed that $5k seems to be a sort of limit on how much some posters on the board are putting into each preferred. If you were to break it down to a % of total holdings, what would you put the % into each at? Was thinking 5% into each holding would be a good number, but that could exceed $5k.

Thank you!

Welcome to the thread.

I have all my preferreds in IRAs and Roths; there has been no tax consequences. Some preferreds are baby bonds or trust issues. They pay interest not dividends, interest is taxed higher in a taxable account than dividends. As Coolius mentioned, REIT preferreds are not QDI, as they are pass thru entities, the REIT pays no tax, but you do not in a tax deferred account.

As far as the $5,000 limit, I use it to purchase 200 shares of each security, and I always buy under par. (usually under $25.00) If I have held a security for a long time and feel comfortable with it, I will buy more if it goes below my original basis. I consider my preferreds part of my bond/fixed income portfolio, and I buy and hold. Some others here are dividend miners, and arbitrage dividends/stocks and trade frequently between issues. Anyway is right as long as you make money!

 

[Mulligan]

Hello Gooddog. I think your tax reference was about the MLP preferreds. These are the only type of preferreds that could cause a tax issue inside a tax deferred account. So you may want to be mindful of that if you are looking at MLP preferreds. There are not a lot of those issued though.
Remember (assuming you are in a higher tax bracket than 15%) the QDI preferreds such as utilities and banks generally are perfect income investment vehicles outside retirement accounts due to 15% tax rate. The full rate taxable issues I keep in my retirement accounts.