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

[wannabe]

Mulligan, Not sure what you mean about price erosion, perpetual issues and the long end moving north. We don't invest in "perpetual preferred" stock, at least to our knowledge, other than the fact that any preferred can live forever if the issuer chooses to let it remain outstanding.

Does "the long end move north" mean if interest rates move up to say 8% causing everyone to abandon 5 or 6% issues causing them to drop in price to yield the new 8? My personal view, buttressed by the monthly FRB Economic Letter from the 12th district in San Francisco, is that we are in for a long period of relatively low rates that should make the 5s & 6s attractive as long as we need them to be.

Overall our risk parameters are: Moody/S&P investment grade, NYSE traded, 15% tax eligible, 5-6% yields, with extended call protection particularly if they are purchased at a premium - which just about every one seems to be. In short we are looking for a "guaranteed" income stream from this area.

 

[Mulligan]

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

Mulligan, Not sure what you mean about price erosion, perpetual issues and the long end moving north. We don't invest in "perpetual preferred" stock, at least to our knowledge, other than the fact that any preferred can live forever if the issuer chooses to let it remain outstanding.



Does "the long end move north" mean if interest rates move up to say 8% causing everyone to abandon 5 or 6% issues causing them to drop in price to yield the new 8? My personal view, buttressed by the monthly FRB Economic Letter from the 12th district in San Francisco, is that we are in for a long period of relatively low rates that should make the 5s & 6s attractive as long as we need them to be.



Overall our risk parameters are: Moody/S&P investment grade, NYSE traded, 15% tax eligible, 5-6% yields, with extended call protection particularly if they are purchased at a premium - which just about every one seems to be. In short we are looking for a "guaranteed" income stream from this area.

Wannabe, yes, you are investing in perpetual preferreds...You just have been spoiled in the last 5 years where preferreds were called (a lot of old ones too) because Of constantly declining long end yield curve and people bidding up preferreds chasing income looking for yield... If you look at the prospectus they will either say perpetual or redeemed only at companies option. If ten year goes to 3.5% this new ALL issue will be under $23 in no time. At 4% consider it $20. That is just largely the way it works... In 2013 the 10 year peaked just above 3%...People assumed “rate normalization” was occurring. This led to the Taper Tantrum...Preferreds in 5% -6% yield got pummeled... Look at high quality IPL-D which suites your present risk level...It is Baa2, 5.1% yield and currently trades right around par... This issue got pummeled all the way down to 20.28... Yields reversed because Feds started “operation twist” or whatever it was called and drove down long end of yield curve... Preferreds rebounded and all was forgotten... This new All State issue (outside of regulatory reasons from Company) will likely never get called. These issues are not as stable as past few years indicated....Even my precious AILLL got pummeled to $17 during 08-09 crisis, and utilities had no financial crisis of any type then....Many of the reit $25 preferreds traded down to $4-$5 dollars a share...Yes, that low...And many of the bank ones went there also... Just something to be aware of...

 

[wannabe]

Mulligan, Thank you for your insight on what can happen. We have only been in this game for a couple of years and your experience is much deeper.

Also I think you have a traders view of this market; ours is strictly income. I would be delighted if a $25 preferred I own dropped to $5. If they don't suspend the dividend of $1.5, a $5 preferred would yield 30%. I would double down.

The risk I see in this is if they suspend the dividend. I have not heard of that happening, but perhaps you have seen it over the years you have been involved. Would like to know your take on it.

 

[Mulligan]

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

Mulligan, Thank you for your insight on what can happen. We have only been in this game for a couple of years and your experience is much deeper.



Also I think you have a traders view of this market; ours is strictly income. I would be delighted if a $25 preferred I own dropped to $5. If they don't suspend the dividend of $1.5, a $5 preferred would yield 30%. I would double down.



The risk I see in this is if they suspend the dividend. I have not heard of that happening, but perhaps you have seen it over the years you have been involved. Would like to know your take on it.

I just was trying to present a worst case scenario for you...Some people dont like cap losses to get income. Some buy and holders do not mind....Yes, I am a hybrid preferred buyer. I dont like capital losses, but like income. So this causes me to buy and hold different issues than might interest you. The 08-09 was not a typical recession. It was a finance crisis led recession where capital markets locked up...This meant debt wasnt easily available and preferreds sit under debt. So if companies couldnt roll over their debt, the preferreds were hanging by a thread...
Yes, you can find safe preferreds that always pay despite price movements. I owned one for a while that hasnt missed a payment since 1863.. Just me, but gun to my head I would trust All State for payment more than a bank due to what they specialize in.
As far as the $5 chance again, I doubt that would happen again like it did for Bank America type preferreds. Even at that price back then the fear was so great they didnt seem like a deal at that price...BAC about went under without Tarp and Buffett pumping them funds.
I sent you a PM for a couple safe beyond safe issues that may suit your stated needs. See what you think.

 

[brokrken]

Look at high quality IPL-D which suites your present risk level...It is Baa2, 5.1% yield and currently trades right around par...

Although not a preferred, but exchange traded debt, I think TBB fits the bill here, too. 5.35% Coupon trading a shade over par, callable in 2022 and Baa1. Although I don't think it's eligible for the preferential tax treatment.

May actually put this one in my IRA/fairly safe bucket.

 

[Mulligan]

Although not a preferred, but exchange traded debt, I think TBB fits the bill here, too. 5.35% Coupon trading a shade over par, callable in 2022 and Baa1. Although I don't think it's eligible for the preferential tax treatment.

May actually put this one in my IRA/fairly safe bucket.

KTBA is a better deal Ken at 6%... Same standing with TBB... Both ATT debt... You will be dead likely before either matures, lol. Bought 300 more shares of AILLL (yes, I own thousands) at $26.75 and them the thing goes nuts and blows up...4300 shares traded and has spiked to $27.29... Crazy...Hell no I aint selling. I learned my lesson...The bedrock will never be removed from the house again.

 

[Coolius]

KTBA is a better deal Ken at 6%... Same standing with TBB... Both ATT debt... You will be dead likely before either matures, lol. Bought 300 more shares of AILLL (yes, I own thousands) at $26.75 and them the thing goes nuts and blows up...4300 shares traded and has spiked to $27.29... Crazy...Hell no I aint selling. I learned my lesson...The bedrock will never be removed from the house again.

I second Mulligan's rec of KTBA. Bought it in late 2017 at $28.86. Very stable SWAN stock, which I intend to keep indefinitely. And a higher yield than TBB ( which I used to own ).

Spike in AILLL is due to it going ex-div Friday. Best not to chase tomorrow, but wait for it to adjust down the $0.40 on Friday.

 

[Mulligan]

I second Mulligan's rec of KTBA. Bought it in late 2017 at $28.86. Very stable SWAN stock, which I intend to keep indefinitely. And a higher yield than TBB ( which I used to own ).

Spike in AILLL is due to it going ex-div Friday. Best not to chase tomorrow, but wait for it to adjust down the $0.40 on Friday.

It usually happens but this was crazy... Ask was $26.90, nothing happening... zero shares traded 2 hours before close...I put bid in at $26.75...30 minutes later 500 shares trade at $26.80, then mine got swallowed up at 26.75....Then it went crazy last hour... bought up and up to 27.39.... 6 months ago I would have sold all I could at 27.20 and above...I am just treating it as noise now...When it drops again to a better price, I may just buy more....

 

[Mulligan]

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

It usually happens but this was crazy... Ask was $26.90, nothing happening... zero shares traded 2 hours before close...I put bid in at $26.75...30 minutes later 500 shares trade at $26.80, then mine got swallowed up at 26.75....Then it went crazy last hour... bought up and up to 27.39.... 6 months ago I would have sold all I could at 27.20 and above...I am just treating it as noise now...When it drops again to a better price, I may just buy more....

Here is what happens when you chase an illiquid....Look at the todays trades...Notice all at end of day....I cant get it to seperate, but first 6 digits are the time, the next four with decimal is trade price, and the rest are the volume of each trade.


Time and Sales for Ameren Illinois Co Depositary Sh Repstg 1/4 Sh Pfd 6.625% (AILLL)Apr 04, 2018
Symbol:
TimePriceVolumeMarket
15:58:0527.39100OTO
15:51:2227.29100OTO
15:51:0127.24100OTO
15:50:4727.29300OTO
15:46:2627.24100OTO
15:45:5727.15200OTO
15:45:5727.15300OTO
15:45:5627.15200OTO
15:39:0327.24280OTO
15:38:2427.24290OTO
15:26:5827.14100OTO
15:26:5227.14500OTO
15:26:2727.13100OTO
15:25:5827.10100OTO
15:13:3426.95130OTO
15:11:2426.90200OTO
14:22:1326.75500OTO
14:21:5326.75300OTO
14:02:3526.80500OTO
04/0226.80200OTO
04/02

 

[brokrken]

KTBA is a better deal Ken at 6%... Same standing with TBB... Both ATT debt... You will be dead likely before either matures, lol. Bought 300 more shares of AILLL (yes, I own thousands) at $26.75 and them the thing goes nuts and blows up...4300 shares traded and has spiked to $27.29... Crazy...Hell no I aint selling. I learned my lesson...The bedrock will never be removed from the house again.

Good point, forgot about that one. Any reason why there would be such a big spread between current yields (5.3 - 6) on basically the same risk?

 

[Coolius]

Mulligan, that last $27.39 100 share sell was me.

Stuck in an order to sell 400 @ $27.39, just for fun, surprised to see it partially filled.

Didn't want to see any more of my holding get taken away, so quickly cancelled the rest.

Now looking to buy back at a reasonable price. ( as long as the dividend adjusted price on Friday is $26.97 or less, my flip will be profitable, but only a minuscule amount )

 

[Mulligan]

Mulligan, that last $27.39 100 share sell was me.

Stuck in an order to sell 400 @ $27.39, just for fun, surprised to see it partially filled.

Didn't want to see any more of my holding get taken away, so quickly cancelled the rest.

Now looking to buy back at a reasonable price. ( as long as the dividend adjusted price on Friday is $26.97 or less, my flip will be profitable, but only a minuscule amount )

Oh you will get that, no problem...Maybe tomorrow, lol...Easy money!

 

[Mulligan]

Good point, forgot about that one. Any reason why there would be such a big spread between current yields (5.3 - 6) on basically the same risk?

Nobody knows about KTBA...Very old and illiquid... Every now and then it springs a leak and shares come flying out....I flipped several hundred shares several times in a week from $28 to $29 when it was bouncing and a bit liquid a couple months ago. TBB is just the typical new issue market fleecing companies issued to get cheap long term term. It is the same risk...Both are subordinated debt... If ATT eliminates the divi, its time to get nervous as in bankruptcy, either one of these is just ahead of the commons in claims for the scraps. Dont see that as a problem for a long while though.

 

[bobandsherry]

Hey Mulligan - just curious (and if you don't want to share just tell me to go away), what was the return on your portfolio for 1st quarter. Most of the peeps who are deep into common holdings found they were slightly under water. I ended up just slightly under 1% (not annualized), but very volatile month over month especially when January looked like it was shooting for the moon. I didn't expect that to hold and made some plays to keep some of those profits (not enough though). So I'm curious to compare with a mostly preferred portfolio as to what you saw thinking you've probably were up as well and probably even more so.

 

[Mulligan]

Hey Mulligan - just curious (and if you don't want to share just tell me to go away), what was the return on your portfolio for 1st quarter. Most of the peeps who are deep into common holdings found they were slightly under water. I ended up just slightly under 1% (not annualized), but very volatile month over month especially when January looked like it was shooting for the moon. I didn't expect that to hold and made some plays to keep some of those profits (not enough though). So I'm curious to compare with a mostly preferred portfolio as to what you saw thinking you've probably were up as well and probably even more so.

I can share, Bob but its largely meaningless. I just checked the other day and it was 3.3% end of March... I also had a few dividends in my pocket but not received until 4/15 I havent included, so its a bit higher...Keep in mind this isnt 3.3% just from yield collecting. Had some very nice churn flips and reenters several times.. Also, I have been in the right ones at right time (high yield, safe high yield that should be called, adjustables, and term dated) Plus throw in a bloated profitable one time trade of buying 100 shares at $140ish and selling them all over $180... Counting a preferred that will be redeemed from merger by end of this year with a 30% cap gain, I could just sell out now, and put everything in 9 month tbill and call it a 7% return for the year...Tempting......
Keep in mind my goal isnt to beat the market in any way. I still think income issues face heavy headwinds going forward, especially the lower 5% safe issues. Just my opinion. I like to trade and certain preferreds have unique and rather predictable trading behaviors where it is rather easy to turn a 6% yielder into a 12% returner over the year...As long as interest rate environment is hospitable to such trades... I think I was 11% last year, 14% year before, and 16% before that...Its getting harder as my results show...
This is just what I do...I am under no illusion of beating market. My pension has plenty of common stocks...So I have fun doing something else.

 

[bobandsherry]

Yep, aware that your goal isn't to beat the market, but with all the turmoil in 1Q I thought it would just be interesting to compare with how a largely perferred performed. I have a few preferreds (thanks to you it's more than it was), plus a load in safe cash (with 4.5% min), so it that helped me to come out better than the market, but from what I saw in my small mix of preferreds it seemed that you would be doing better overall, and you did.

And totally agree with you on the interest rate head winds. You know I've only been investing mostly in the adjustable preferreds because of that risk.

Thanks for sharing.

 

[aja8888]

Yep, aware that your goal isn't to beat the market, but with all the turmoil in 1Q I thought it would just be interesting to compare with how a largely perferred performed. I have a few preferreds (thanks to you it's more than it was), plus a load in safe cash (with 4.5% min), so it that helped me to come out better than the market, but from what I saw in my small mix of preferreds it seemed that you would be doing better overall, and you did.

And totally agree with you on the interest rate head winds. You know I've only been investing mostly in the adjustable preferreds because of that risk.

Thanks for sharing.

Bob, I'm curious, and probably others are here are also, as to where you have "safe cash @ 4.5%". I know of no similar animal at this time..

Do you wish to share that?

 

[bobandsherry]

Bob, I'm curious, and probably others are here are also, as to where you have "safe cash @ 4.5%". I know of no similar animal at this time..

Do you wish to share that?

Heh! It's in my pension (cash balance) from my previous employer. It pays One Year TBill + 1%, but with min of 4.5%. As you can imagine it's been at 4.5% for quite some time and expect it to be there for quite some time too. It's funny, they offer me an annuity that would pay me less than what my balance would grow with just interest....

In hindsight I'd be much further ahead of the game if I had transferred into my 401K (especially last year when 401K was up over 20%) or IRA when I retired. But I figured it's about as safe as I can get for cash and has upside if rates go crazy. It's liquid, I can pull it out or transfer whenever I want. As you mentioned, no other similar animal at this time

 

[Mulligan]

Heh! It's in my pension (cash balance) from my previous employer. It pays One Year TBill + 1%, but with min of 4.5%. As you can imagine it's been at 4.5% for quite some time and expect it to be there for quite some time too. It's funny, they offer me an annuity that would pay me less than what my balance would grow with just interest....



In hindsight I'd be much further ahead of the game if I had transferred into my 401K (especially last year when 401K was up over 20%) or IRA when I retired. But I figured it's about as safe as I can get for cash and has upside if rates go crazy. It's liquid, I can pull it out or transfer whenever I want. As you mentioned, no other similar animal at this time

I wouldn’t apologize either taking some action in that myself!

 

[Coolius]

Decided to reach out on the risk spectrum today, bought 300 shares of RILYZ, a baby bond maturing in 2027, at $25.37.

Upcoming XD next week, and once the $0.46 dividend is paid, my cost basis swings below par. And after that the main risk is company specific ( BK ), or that of interest suspension ( which I feel is very low ).

Provided, of course, that I hold till maturity, which I fully intend to do.

And, right in keeping with my unchallenged record of totally awful trade timing, the price drops to $25.34 a few minutes after my trade....

 

[aja8888]

Heh! It's in my pension (cash balance) from my previous employer. It pays One Year TBill + 1%, but with min of 4.5%. As you can imagine it's been at 4.5% for quite some time and expect it to be there for quite some time too. It's funny, they offer me an annuity that would pay me less than what my balance would grow with just interest....

In hindsight I'd be much further ahead of the game if I had transferred into my 401K (especially last year when 401K was up over 20%) or IRA when I retired. But I figured it's about as safe as I can get for cash and has upside if rates go crazy. It's liquid, I can pull it out or transfer whenever I want. As you mentioned, no other similar animal at this time

kudo's on that 4.5% decision.

 

[Mulligan]

Decided to reach out on the risk spectrum today, bought 300 shares of RILYZ, a baby bond maturing in 2027, at $25.37.

Upcoming XD next week, and once the $0.46 dividend is paid, my cost basis swings below par. And after that the main risk is company specific ( BK ), or that of interest suspension ( which I feel is very low ).

Provided, of course, that I hold till maturity, which I fully intend to do.

And, right in keeping with my unchallenged record of totally awful trade timing, the price drops to $25.34 a few minutes after my trade....

Down 3 cents? You are financially ruined! .... Going back to a trade that has worked before...Sold out 800 shares of MER-P today at 26.23...Rotated all into ALLY-A at 25.97 which I already had similar amount...Will ride this to ex and payment date...Let price appreciate quickly back near$26 where it sits....Then at that point a month from now I will be about 1 month out from MER-P. Then throw it all at it and wait for it to climb back which it also does quickly. So this method will attract 2 payments in one 3 month cycle... This works because of the unique past call above market yield which keeps it in a tight trading range.

 

[Mulligan]

Down 3 cents? You are financially ruined! .... Going back to a trade that has worked before...Sold out 800 shares of MER-P today at 26.23...Rotated all into ALLY-A at 25.97 which I already had similar amount...Will ride this to ex and payment date...Let price appreciate quickly back near$26 where it sits....Then at that point a month from now I will be about 1 month out from MER-P. Then throw it all at it and wait for it to climb back which it also does quickly. So this method will attract 2 payments in one 3 month cycle... This works because of the unique past call above market yield which keeps it in a tight trading range.

Sold out remaining shares of MER-P and replenished my AHT-D. Sold half that off earlier this week at 25.35 and back in at. 25.19. Market is stuck in quicksand on this issue... Call risk is still there on remaining float and next divi has not been declared... Good entry point... Unusual position where my biggest 4 positions are AILLL, ALLY-A, NSS, and AHT-D.... But I have alot of safer issues with smaller amounts that balances out... Looking to sell off a smaller high yield issue tomorrow and roll into another 9 month TBill. Keeping the barbell approach... Chasing the yield temporarily
higher on one end, and lowering it on the other end as I will count the TBills as low income, short duration “preferreds”.

 

[aja8888]

Chasing the yield temporarily
higher on one end, and lowering it on the other end as I will count the TBills as low income, short duration “preferreds”.

I sold some REIT funds earlier this year before the market turmoil and have been buying 6 month and 12 month TBills at auction with the cash. Kind of a ladder until rates stop climbing.

 

[Mulligan]

I sold some REIT funds earlier this year before the market turmoil and have been buying 6 month and 12 month TBills at auction with the cash. Kind of a ladder until rates stop climbing.

The yields are a helluva lot better than a year ago...If I didnt have a pension, more would tossed in there than I have.. I probably will bite on one more 9 month secondary issue...I like the cash locked down until Jan 2019...The fed may be done hiking by then, and may be a bargain somewhere at maturity for me.