Preferred Stock Investing-The Good , The Bad and The In Between 2021

[sengsational]

I will be getting my first preferred shares of my life in a few weeks. Not really what I intended, but that's the way the cookie crumbled. I have common shares and the company is going through a bankruptcy in order to get out from under a pile of litigation. Once free of that liability, it should continue to be a viable business. But the point is that the best value proposition includes exercising rights to preferred shares, so that's where I'm going. Reluctant member of the preferred shares club.

 

[DR1959]

Thanks.
I wrote a put against the common, if I get put in I will hold.
I think with all the covid shots and boosters, BDX is a buy!

 

[bobandsherry]

Heads up... looks like Ally is calling ALLY-B, or per their new prospectus a portion of them. From the preliminary prospectus:

We intend to use the net proceeds from this offering to redeem a portion of the Company’s 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust I. See “Use of Proceeds.”

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000040729/f715f69a-88ad-4623-b445-9bb7629db220.pdf

 

[Running_Man]

Question for all or any, if you were to purchase just one Preferred for the intermediate term (3-5 years) which preferred would you buy and why?

 

[pb4uski]

The main concern these days with preferreds is call risk, so I would focus on investment grade issuers that trade around their par/call value.

Schwab has a pretty good preferred stocks screener... go to Research/Screeners/Preferred Shares.

A few that look interesting: BAMH $24.96 5.14% yield BBB, SCHW/PRJ $24.95 4.46% yield BBB, USB/PRR $25.00 4.45% yield BBB, NMK/PRC $102.04 3.92% yield BBB-, BML/PRH $21.90 3.47% BBB-.

I own BAMH and different BoA(BML) and SCHW issues. YMMV.

 

[Coolius]

Heads up... looks like Ally is calling ALLY-B, or per their new prospectus a portion of them. From the preliminary prospectus:


https://d18rn0p25nwr6d.cloudfront.net/CIK-0000040729/f715f69a-88ad-4623-b445-9bb7629db220.pdf

bobandsherry, ALLY-A is the 8.125% series that will be called in part or whole.


The ALLY-B is a former issue that was called in 2016, so no longer exists. This new issue on the Prospectus is referred to as Series B, so I think it will be known as ALLY-B as and when it comes out.

 

[bobandsherry]

bobandsherry, ALLY-A is the 8.125% series that will be called in part or whole.


The ALLY-B is a former issue that was called in 2016, so no longer exists. This new issue on the Prospectus is referred to as Series B, so I think it will be known as ALLY-B as and when it comes out.

Yep, it's ALLY-A, I used to own that for a long time. My bad, the new issue looks to be called "B".

 

[pb4uski]

Curious to see if I'm missing something. PRE-H was called effective May 3. I received a dividend on Mar 1. It pays 7.25% or $1.81 a year. I calculate that on May 3, I would receive the $25 call value plus 31c of interest ($25*7.25%/365*(30+30+3). I might be off a day or so but it deosn't matter much.

I offered to sell it today for $25.32 and it all sold so once it settles I can go buy something else.

What am I missing? Why would somone buy it for $25.32 today to receive $25.31 or $25.32 on May 3?

https://www.quantumonline.com/search.cfm?tickersymbol=PRE-H&sopt=symbol

 

[Mulligan]

Question for all or any, if you were to purchase just one Preferred for the intermediate term (3-5 years) which preferred would you buy and why?

Running Man, I buy with idea I could flip immediately. If I was assuming buy and hold for 3-5 years that would provide a different answer. The prices are such now (high relatively speaking) one really is looking at quick flipping gains, or just coupon clipping until maturity on a duration issue. There are really very few 3-5 duration type issues.
For example I bought FPI-B on a drop today at $25.70. Its a participating preferred meaning it appreciates with farm land increase. So now its redemption value is $25.80 not $25. And it should adjust higher come August. But...Its callable and or convertible to common stock come September. So that really doesnt fit 3-5 horizon as it must be redeemed or converted by 2024 or it goes to 10% which wont happen.

 

[Mulligan]

Running Man, I buy with idea I could flip immediately. If I was assuming buy and hold for 3-5 years that would provide a different answer. The prices are such now (high relatively speaking) one really is looking at quick flipping gains, or just coupon clipping until maturity on a duration issue. There are really very few 3-5 duration type issues.
For example I bought FPI-B on a drop today at $25.70. Its a participating preferred meaning it appreciates with farm land increase. So now its redemption value is $25.80 not $25. And it should adjust higher come August. But...Its callable and or convertible to common stock come September. So that really doesnt fit 3-5 horizon as it must be redeemed or converted by 2024 or it goes to 10% which wont happen.

RM, added thought. I tilt things where assumption is rates will move up some. This is typically not good for perpetual preferreds that do not have to be called. Especially IG low yielding ones that compete closer to treasuries. That being said I also like issues like SESCF which is past call and a 2027 mandatory maturity senior note from Seaspan. It traded today at $25.10 and recently went exD. So you arent exposed to a call loss here even if it gets redeemed soon. Its a 7.375% coupon. Seaspan has BBB- senior secured credit rating which is good for a shipper. So this would slot BB ish debt. Milk the cow until its called and move on if it happens.

 

[Mulligan]

Curious to see if I'm missing something. PRE-H was called effective May 3. I received a dividend on Mar 1. It pays 7.25% or $1.81 a year. I calculate that on May 3, I would receive the $25 call value plus 31c of interest ($25*7.25%/365*(30+30+3). I might be off a day or so but it deosn't matter much.

I offered to sell it today for $25.32 and it all sold so once it settles I can go buy something else.

What am I missing? Why would somone buy it for $25.32 today to receive $25.31 or $25.32 on May 3?

https://www.quantumonline.com/search.cfm?tickersymbol=PRE-H&sopt=symbol

I looked at it PB, and your math looks about spot on to me. Maybe people are not aware of redemption notice? typically they settle in a few cents below redemption price to accommodate both the dumpers and the penny scalpers.

 

[Sunset]

Question for all or any, if you were to purchase just one Preferred for the intermediate term (3-5 years) which preferred would you buy and why?

I'm holding onto my SPLP-A , so I guess if I didn't have any, I'd buy some as it pays a good rate, is over $4 under the call price.
I have it in an IRA for simplicity in taxes as its a K1 type investment, that I don't want to deal with.

 

[Winemaker]

On April 16th, Bloomberg reported that Bank of America set a new record of selling $15 billion of bonds. I know there are CCAR requirements, but I would expect some of their expensive preferreds to be called soon.

 

[Mulligan]

I'm holding onto my SPLP-A , so I guess if I didn't have any, I'd buy some as it pays a good rate, is over $4 under the call price.
I have it in an IRA for simplicity in taxes as its a K1 type investment, that I don't want to deal with.

We have had a nice bump on this the past few days havent we Sunset. Compared to whats out there, I agree with you. One has to keep amount small in IRA to avoid potential UBTI kick in the nards though.
I decided to jump in water this year. I always played to UBTI limits and stay in IRAs also with K-1. But I already maxed it out buying CEQP-, so I just bit my lip and bought 1000 shares of SPLP-A in my taxable earlier this year. I hear being a one line K-1 its easily inputted into Turbo.

 

[Texas Proud]

I have not been doing much of anything with my preferred... just letting them ride...


But, what is happening with the PCG issues? I bought some hoping to flip and so far nothing...


I have a gain on them so might just sell if nothing is going to happen.

 

[Mulligan]

I have not been doing much of anything with my preferred... just letting them ride...


But, what is happening with the PCG issues? I bought some hoping to flip and so far nothing...


I have a gain on them so might just sell if nothing is going to happen.

I have played a few times minor with couple hundred shares for 50 cent pops. This is going on between the wide bid and ask spreads as they are generally staying put in a tight range. That being said cashing the divi still could be a longer while off. They said its unknown when they would pay preferreds from last SEC filing.
That being said owning these may gather caution. They just got in trouble again on their tree cutting (or lack there of). They were put on increased monitoring. If they reach a certain level they lose their operating license.

 

[pb4uski]

Curious to see if I'm missing something. PRE-H was called effective May 3. I received a dividend on Mar 1. It pays 7.25% or $1.81 a year. I calculate that on May 3, I would receive the $25 call value plus 31c of interest ($25*7.25%/365*(30+30+3). I might be off a day or so but it deosn't matter much.

I offered to sell it today for $25.32 and it all sold so once it settles I can go buy something else.

What am I missing? Why would somone buy it for $25.32 today to receive $25.31 or $25.32 on May 3?

https://www.quantumonline.com/search.cfm?tickersymbol=PRE-H&sopt=symbol

I looked at it PB, and your math looks about spot on to me. Maybe people are not aware of redemption notice? typically they settle in a few cents below redemption price to accommodate both the dumpers and the penny scalpers.

Thanks Mulligan. It is reassuring to have someone knowledgable confirm that I'm understanding the cash flows correctly.

Preferred buyers are funny/strange sometimes I guess.

 

[brokrken]

We have had a nice bump on this the past few days havent we Sunset. Compared to whats out there, I agree with you. One has to keep amount small in IRA to avoid potential UBTI kick in the nards though.
I decided to jump in water this year. I always played to UBTI limits and stay in IRAs also with K-1. But I already maxed it out buying CEQP-, so I just bit my lip and bought 1000 shares of SPLP-A in my taxable earlier this year. I hear being a one line K-1 its easily inputted into Turbo.

I actually sold out of this one at $21.39 on Friday. I had a GTC much lower than that but I had forgotten about it (you may remember me complaining about my ask not getting taken) and it had expired, so when I noticed the run up I took the gain. Will be looking for a reentry point now.

 

[pb4uski]

We have had a nice bump on this the past few days havent we Sunset. Compared to whats out there, I agree with you. One has to keep amount small in IRA to avoid potential UBTI kick in the nards though.
I decided to jump in water this year. I always played to UBTI limits and stay in IRAs also with K-1. But I already maxed it out buying CEQP-, so I just bit my lip and bought 1000 shares of SPLP-A in my taxable earlier this year. I hear being a one line K-1 its easily inputted into Turbo.

I guess I need some education here. I recently bought CEQP- in my Roth, not realizing it was a MLP.

From what I'm reading I need to make sure that UBTI is less than $1,000 a year to avoid the Roth having to file a tax return. So if CEQP- dividend is 84c a year I should limit myself to no more than 1190 shares... make sense?

I actually have 1600 shares but the shares and have yet to receive a dividend and they are up 12% from where I bought in so if I have to sell, say, 500 shares to get below the $1,000 limit then it is no big deal for me.

Or maybe I'll sell all 1,600 shares and rebuy in my taxable account and tolerate the K-1 like you plan to do.

 

[youbet]

Preferred buyers are funny/strange sometimes I guess.

I love this understatement! Understating the obvious is my favorite brand of humor.

 

[Winemaker]

I guess I need some education here. I recently bought CEQP- in my Roth, not realizing it was a MLP.

From what I'm reading I need to make sure that UBTI is less than $1,000 a year to avoid the Roth having to file a tax return. So if CEQP- dividend is 84c a year I should limit myself to no more than 1190 shares... make sense?

I actually have 1600 shares but the shares and have yet to receive a dividend and they are up 12% from where I bought in so if I have to sell, say, 500 shares to get below the $1,000 limit then it is no big deal for me.

Or maybe I'll sell all 1,600 shares and rebuy in my taxable account and tolerate the K-1 like you plan to do.

Most of the MLPs that I have in tIRAs that pay dividends, there is very little UBTI listed in the annual K-1. In my case, Fidelity sends me a letter each year, reminding me that if UBTI exceeds $1000, the trustee will have to file a return, but it has never happened.

Does CEQP have a history of paying out a large amount of CEQP? if it does, let me know as I have a limit order in to purchase $5,000 worth. Thanks.

 

[Mulligan]

I guess I need some education here. I recently bought CEQP- in my Roth, not realizing it was a MLP.

From what I'm reading I need to make sure that UBTI is less than $1,000 a year to avoid the Roth having to file a tax return. So if CEQP- dividend is 84c a year I should limit myself to no more than 1190 shares... make sense?

I actually have 1600 shares but the shares and have yet to receive a dividend and they are up 12% from where I bought in so if I have to sell, say, 500 shares to get below the $1,000 limit then it is no big deal for me.

Or maybe I'll sell all 1,600 shares and rebuy in my taxable account and tolerate the K-1 like you plan to do.

PB, I have heard CEQP- is heavy UBTI. I have owned it before a few years back but sold for a quick gain so I never got deep with it then. I will this time though. I dont know how penal it is to go over UBTI in Roth.

 

[pb4uski]

From https://seekingalpha.com/article/4415806-10-yielding-preferred-cannot-be-called-crestwood-equity

Tax Considerations for Owning CEQP – in a Retirement Account

As is generally the case with partnerships, the preferred shares (units) also issue K-1 tax forms. Investors should be aware of the tax implications of becoming a limited partner when investing in these instruments. Of particular concern with CEQP– are potential UBTI consequences (Unrelated Business Taxable Income) if it is owned in a retirement account. Typically the UBTI amount on K-1s from preferreds is minimal, however, recent K-1s have shown that income from the CEQP preferreds to be almost 100% UBTI.

HDO cannot give advice for your specific tax situation, but the general recommendation is that partnerships that issue K-1s are best held in taxable accounts. It's permissible to own CEQP– in an IRA account, but even though a retirement account may be tax advantaged, it incurs a tax liability if the reported UBTI for the year exceeds the $1,000 exemption. Our understanding is that UBTI taxes can be substantially higher than ordinary income rates even with the $1,000 exemption, so this shouldn’t be taken lightly.

 

[pb4uski]

So, I've convinced myself to hold the 1600 shares in a taxable account rather than in my Roth. I guess that I could just transfer the 1600 shares that I own currently from the Roth to my taxable account, but since I have a ~12% gain I think I'm better off to sell in the Roth where the gain is tax-free and then buy in the taxable account.

I could have the buy and the sell in separate windows and click on buy and sell at the same time, but is there a better way to do this so that they sell an the buy are at the same price at market?

 

[Mulligan]

So, I've convinced myself to hold the 1600 shares in a taxable account rather than in my Roth. I guess that I could just transfer the 1600 shares that I own currently from the Roth to my taxable account, but since I have a ~12% gain I think I'm better off to sell in the Roth where the gain is tax-free and then buy in the taxable account.

I could have the buy and the sell in separate windows and click on buy and sell at the same time, but is there a better way to do this so that they sell an the buy are at the same price at market?

That should work pretty good. The bid ask spread for CEQP- is pretty tight. Your trade most likely will get intercepted. What I typically do is if bid is .84 and ask is .88 I usually insert bid at .86 and that way Im not out a couple pennies. A few times I have done it and slapped market order on it. And actually bought my shares cheaper and sold my share higher. Thats how fast they can move these.