Question about dividend stocks - Curious

[NW-Bound]

I have not owned any preferred. Thought about it a few times, made a mental note to check it out, then forgot it.

Come to think of it, the preferred yields from utilities seem to pay you enough relative to long bonds to compensate for the risks. I might be more comfortable with preferreds than with long bonds to park some of the portion I reserved for fixed income, for diversification purposes.

I need to think some more about this.

 

[eta2020]

Take CNLPL a preferred I own. A 1968 issued 6.48% $50 par stock. If you look at the 20 year stock chart of it, you see very little historical movement. It "collapsed" all the way down to about $45 during the depth of the 08-09 crisis. Unlike the REIT and bank preferreds which many went to $8-$9 dollars ($25 par).
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I do not know if this is a rule for Preferred.
I look at charts of PFF from April 2007 and compare them to BND and S&P 500
and I see PFF nose dive, BND stay flat and S&P also nose dived.

S&P is by now way up from 2007 prices while PFF is still way lower (25%). Of course during the years PFF payed hefty yield.

PFF nose dived perhaps even more aggressively than S&P 500.

 

[NW-Bound]

PFF has lots of finance companies. As culprits in the mortgage meltdown, they deserved to be punished. But as Mulligan pointed out, they recovered too, thanks to TARP.

 

[eta2020]

Into that chart starting in April 2007......

And funny is if I plug good old boring stock that always raises dividend by 7-10% that is Coca Cola it beats PFF, S&P, VIG, BND and CNLPL and it it raised dividend in 2008 and 2009.

With good quality all you need is time and patience.

 

[Mulligan]

I have not owned any preferred. Thought about it a few times, made a mental note to check it out, then forgot it.

Come to think of it, the preferred yields seem to pay you enough relative to long bonds to compensate for the risks. I might be more comfortable with preferreds than with long bonds to park some of the portion I reserved for fixed income, for diversification purposes.

I need to think some more about this.

It is very obvious nobody on Wall St. pays any attention to them. A group of traders were talking about 7% yield as crazy reach for income for bonds. Well yes it is on junk bonds. But you can almost get that in relative safety with certain preferreds. Many of these companies that have left their 6% preferreds outstanding are borrowing money with bonds for 3-4% for 20-30 years.
I have heard one trader in a year on CNBC mention preferreds, and all the talking head could respond to was "oh the things Warren Buffet buys". They know nothing about them. Why buy a junk rated bond for 7% plus when you can buy the preferreds of an investment graded company for 6% plus.
It is like one person I read who is very knowledgable on preferreds said. "Its like being at the end of the lunch line and getting fed plus all the leftovers too. As long as their is enough food for everyone, I will wait at the end of the line and get fed more".
Take Wells Fargo. They have over 5 Billion shares outstanding and pay each share $1.52 a year and that is only a 36% payout ratio. ALL OF THAT has to be wiped out before they can consider suspending their WFC-L preferred which yields around 6.4%. That is WAY safer to me and better value than a senior debt note of some crap company yielding 7% or more.
This isn't the path to excessive riches but if you are interested in part of your money being income stream orientated it is worth studying at least.


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[eta2020]

PFF has lots of finance companies. As culprits in the mortgage meltdown, they deserved to be punished. But as Mulligan pointed out, they recovered too, thanks to TARP.

Yea they recovered by being -22% today from April 2007

 

[Mulligan]

Yea they recovered by being -22% today from April 2007

That is why I am not a big PFF fan or a bank preferred fan (other than WFC in modest doses). Somebody made a killing on these thanks to TARP. Many such as the Merrill Lynch preferreds are still outstanding and paying. They were issued at 7% 25 par and went below $10. That means they are still getting 20% a year dividend plus the capital appreciation that has taken them back above par today. Im not willing to bet all my money on another TARP bailout, so I got less than 10% of my money in bank preferreds, and I certainly am not investing in PFF that is what about 70-80% financials?


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[eta2020]

I will bring up one more point.
Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now.

It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007.

So today you would be collecting 5.5% plus yield

That is why dividends matter

 

[Mulligan]

Yea they recovered by being -22% today from April 2007

You need to remember Eta, that if you bought some of these you would be receiving 20% a year dividend every year. That means your money doubles every 3.5 years.... So it is not down 22% today. It has swamped the market in returns the past 8 years.....BUT....that is irrelevant for today and todays purchases. Comparing preferred to common stock is not a correct comparison. If you have no interest in investing for income stream, you would have no interest in preferreds. And that is not either a good or bad thing in my mind.


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[JPatrick]

At the moment VYM is my fav dividend holding, in fact I'm adding on the big swoons. I also have an old DVY holding, but because it has lots of utility stocks, I'd wait until the future of interest rates is clearer.
Also have a larger holding of EPD, but here you get into K1 issues, which is not really a problem, but a bit of a hassle.
If you go into mutual funds, be careful as we get close to year end. This latest tumble has resulted in huge redemptions which for many funds will mean very big cap gains coming up. You just don't want to be buying close to the cap gain record date. If you do you'll pay some taxes you could have avoided.
But, all in all, right now is a great time to buy..YMMV.

 

[Mulligan]

I will bring up one more point.
Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now.

It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007.

So today you would be collecting 5.5% plus yield

That is why dividends matter

In comparing a preferred stock to ITS common stock, it generally takes 10-15 years for a good company's common stock to catch up to its preferreds yield. Now if the yield of the preferred is reinvested it may take 30 years....BUT that is not considering capital appreciation of the common that may or may not occur.
Comparing common stock to a preferred stock is not a valid comparison. If someone ditched all their common stock to buy preferred stock probably needs to sit down and think what their investment strategy really is and what they are really investing for.


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[eta2020]

In comparing a preferred stock to ITS common stock, it generally takes 10-15 years for a good company's common stock to catch up to its preferreds yield. Now if the yield of the preferred is reinvested it may take 30 years....BUT that is not considering capital appreciation of the common that may or may not occur.
Comparing common stock to a preferred stock is not a valid comparison. If someone ditched all their common stock to buy preferred stock probably needs to sit down and think what their investment strategy really is and what they are really investing for.


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I agree.

I am just trying to show that quality matters and dividend matters. But you need time as you pointed out.

I am not sure about 30 years. AT 8% dividend growth you need 72/8 = 9 years to double your yield. I think 8% dividend growth is not unusual for many good boring companies like P&G, JNJ, KO PEP, CL...

Once you double them you are looking at 5-6% yield on your investment...not far from preferred stocks.

 

[Mulligan]

I agree.



I am just trying to show that quality matters and dividend matters. But you need time as you pointed out.



I am not sure about 30 years. AT 8% dividend growth you need 72/8 = 9 years to double your yield.

I think we are way closer to agreement than maybe what we are saying. The 30 years is a very fluid number. It depends on which company we are discussing. And remember I am referencing a common dividend stock of the SAME company, not mixing an ATT yeild with another companies preferred. Take Wells Fargo....Its common divi yields 2.80% while WFC-L yields 6.37%. Assume a 3% yearly increase and it is going to take a helluva long time to get to that effective yield price. Thus this is why its considered "investing for yield". At todays prices one would have to be a fool to count on a penny of capital appreciation from the preferred. It is solely a commitment to investing for income.
And that may not be what many people need. My Dad switched to preferreds last year on most of his money. He is almost 80. Once he said, "I dont care what the stock price does I want my 6-7% dividend income. I don't care if the stock goes to a penny as long as I get my 6%". I knew then he was a candidate for these issues and helped him buy.


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[Senator]

I will bring up one more point.
Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now.

It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007.

So today you would be collecting 5.5% plus yield

That is why dividends matter

The 5-year chart shows the S&P smoking KO. 88% vs. 40% gains. Since 2007 or longer, KO wins.

I am not saying KO is a bad stock, it's just hard to beat the S&P over time.

 

[NW-Bound]

Yea they recovered by being -22% today from April 2007

But without TARP, many of them would be dead meat. Well, except for Wells Fargo and perhaps a few more I do not know about. Buffett knew about these guys' shenanigan back then. He bought Wells Fargo, if I remember right, but not others.

Anyway, if I am to get preferreds, I would get utilities, but not financial guys. I still hate the latter for the trouble they caused.

 

[NW-Bound]

Buffett is a really funny guy. I still recall in the late 2007 or early 2008 when the news started to break about another bank being in trouble, a reporter asked Buffett if this would be the last shoe to drop, meaning this was all the trouble there was.

Buffett laughed and said that we did not know if it was a centipede. He has a way of making all these cute female reporters giggle. I can never have his wealth, but I like to have some of his humor.

 

[Mulligan]

But without TARP, many of them would be dead meat. Well, except for Wells Fargo and perhaps a few more I do not know about. Buffett knew about these guys' shenanigan back then. He bought Wells Fargo, if I remember right, but not others.

If I remember right, NW ol Warren also bent Goldman Sachs over the barrel and gave them his own special "private preferred stock offering" at 10% and then it was convertible. He made a killing on that. Of course they were begging for capital and he gave it to them at the price he wanted.
I am tinkering with a few bank trust preferreds (which are technically debt, not capital as most true preferreds are) that got their dividends suspended for several years and have made all shareholders current now. Their yields are around 8% today. Not betting the farm on these boys though. And yes they would never have paid them off if Uncle Sam hadn't help dig them out of the hole.


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[modhatter]

Thanks Mulligan for all that helpful information. As I had said, I have owned some preferreds over the years, and they served their purpose well. I did not select them as it was during a time when I first hired an adviser because I knew squat about stocks, bonds, etc.

Where did you look to educate yourself. I believe there are web sites devoted to discussing preferreds but, I don't know the names. Is there a particular site that you would recommend for good information?

I am pretty shy about financials but still own some. I like utilities, even though they can be volatile, but still have shown good returns over the years. It's just a roller coaster ride sometimes (like now, the roller coaster is coming off their highs)

eta2020: I think you were right in your analogy in the long term, but it is really comparing apples to oranges. I don't think Mulligan or anyone would necessarily look at preferreds as a growth move to maximize your returns later years. They are more to fulfill an immediate need as opposed to an eventual need. Besides, to get even a decent return, you should be re-investing the dividends, not spending them. But they can certainly help to boost your income of your current portfolio.

 

[Mulligan]

Thanks Mulligan for all that helpful information. As I had said, I have owned some preferreds over the years, and they served their purpose well. I did not select them as it was during a time when I first hired an adviser because I knew squat about stocks, bonds, etc.



Where did you look to educate yourself. I believe there are web sites devoted to discussing preferreds but, I don't know the names. Is there a particular site that you would recommend for good information?



I am pretty shy about financials but still own some. I like utilities, even though they can be volatile, but still have shown good returns over the years. It's just a roller coaster ride sometimes (like now, the roller coaster is coming off their highs)



eta2020: I think you were right in your analogy in the long term, but it is really comparing apples to oranges. I don't think Mulligan or anyone would necessarily look at preferreds as a growth move to maximize your returns later years. They are more to fulfill an immediate need as opposed to an eventual need. Besides, to get even a decent return, you should be re-investing the dividends, not spending them. But they can certainly help to boost your income of your current portfolio.

Modhatter, the info is kind of random on them. Silicon Investor has a forum where people will notify others of new preferred issues. But they mention all types that may be riskier. Quantumonline has a feature that shows new preferreds when you register (free). Dividend Yield Hunter has a good website and shows many issues with their yields and call dates.
If you interested in electrical preferreds you almost have to type in a common stock utility company ticker symbols, in Quantumonline. Then hit "related securities" and then the list of prefferreds outstanding will show up. Many of these are not shown on other lists because they are not very liquid and can be small issues of 10-20 million.
After that it is checking the financials and such. But I don't get very deep into the numbers as I buy solid companies with decades of dividend payments without suspension.

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[modhatter]

Modhatter, the info is kind of random on them. Silicon Investor has a forum where people will notify others of new preferred issues. But they mention all types that may be riskier. Quantumonline has a feature that shows new preferreds when you register (free). Dividend Yield Hunter has a good website and shows many issues with their yields and call dates.
If you interested in electrical preferreds you almost have to type in a common stock utility company ticker symbols, in Quantumonline. Then hit "related securities" and then the list of prefferreds outstanding will show up. Many of these are not shown on other lists because they are not very liquid and can be small issues of 10-20 million.
After that it is checking the financials and such. But I don't get very deep into the numbers as I buy solid companies with decades of dividend payments without suspension.

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Thank you. I will check those links out.

 

[rayvt]

Preferred Stock Investing

Spend the $15-$20 and buy the book.

 

[Mulligan]

Preferred Stock Investing

Spend the $15-$20 and buy the book.

The author is a knowledgable person and writes occasionally on SA. However be aware the book tries to serve as a dual purpose to pay for his subscription service that are pretty well available with some minor research.


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