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

[aja8888]

I have a couple in taxable I get to do this year….Self serve. I guess I will see in time how forgiving IRS is if I screw it up.

TurboTax handles K-1's with ease. All you do is plug the numbers in their form.

 

[Mulligan]

TurboTax handles K-1's with ease. All you do is plug the numbers in their form.

I have downloaded the basic 1099 forms from brokerages into Turbo. But I assume there is a second leg with K-1s? I stopped right after downloading so I dont know the next step. Will it pop up automatically for me to deal with?

 

[aja8888]

I have downloaded the basic 1099 forms from brokerages into Turbo. But I assume there is a second leg with K-1s? I stopped right after downloading so I dont know the next step. Will it pop up automatically for me to deal with?

You will get the K-1 from the companies website or at taxpackagesupport.com if it's available there. There are no 1099's associated with distributions from MLPs.

Try the company's website under Investor Info and look for a link to the tax package.

Usually, K-1 packages are sent to you directly or they send you an email saying where to download it.

 

[Mulligan]

You will get the K-1 from the companies website or at taxpackagesupport.com if it's available there. There are no 1099's associated with distributions from MLPs.

Try the company's website under Investor Info and look for a link to the tax package.

Usually, K-1 packages are sent to you directly or they send you an email saying where to download it.

Ok received those. But I have “simple” income K-1 preferreds and it appears the income was already on the 1099. Is that possible?

 

[aja8888]

Ok received those. But I have “simple” income K-1 preferreds and it appears the income was already on the 1099. Is that possible?

I've never had any preferreds that had k-1's. But if they reported some income on a 1099, it may be OK.

I know that some MLPs have changed their distribution methods and operate as corporations. They essentially eliminated the partners units and just report with 1099's now. One is Kinder Morgan and another is Oneoak. So I am sure it is possible. Which preferreds are you talking about?

 

[Mulligan]

I've never had any preferreds that had k-1's. But if they reported some income on a 1099, it may be OK.



I know that some MLPs have changed their distribution methods and operate as corporations. They essentially eliminated the partners units and just report with 1099's now. One is Kinder Morgan and another is Oneoak. So I am sure it is possible. Which preferreds are you talking about?

I have CEQP-, BKEPP, SPLP-A…

 

[aja8888]

I have CEQP-, BKEPP, SPLP-A…

CEQP is an MLP and should only issue a K-1 according to their website. Any Unrelated Business Income is reported on the K-1. Should have no 1099 issued.

Same with BKEPP and SPLP-A.

Strange. I have been dealing with MLPs, but just the units as a limited partner, for 15 years and never got anything except a K-1. Whoever sent the 1099 I would call their investor relations dept and ask what it's for. Maybe it has something to do with a distribution from outside the MLP like a corporate holding?

Sorry I can't help more.

Please let me know what you find out though, as now you have my curiosity up.

Cheers,

Tony

 

[Mulligan]

CEQP is an MLP and should only issue a K-1 according to their website. Any Unrelated Business Income is reported on the K-1. Should have no 1099 issued.



Same with BKEPP and SPLP-A.



Strange. I have been dealing with MLPs, but just the units as a limited partner, for 15 years and never got anything except a K-1. Whoever sent the 1099 I would call their investor relations dept and ask what it's for. Maybe it has something to do with a distribution from outside the MLP like a corporate holding?



Sorry I can't help more.



Please let me know what you find out though, as now you have my curiosity up.



Cheers,



Tony

I need to look at my brokerage consolidated form again in next couple of days, as I may not know what I am talking about. I will report back when lazy me gets around to it, ha.

 

[youbet]

Found this.

Preferred shares pay dividends or interest, typically on a quarterly or semiannual basis. As an investor who owns preferred shares through your broker, at the end of the tax year you will receive a Form 1099-INT or 1099-DIV documenting the dividend or interest payments you received on the preferred stock you own.

Taxation of Preferred Stock - Finance - Zackshttps://finance.zacks.com › Tax Information › Tax Planning

The 1099-int and 1099-div are from your brokerage house. The K-1 is from the issuer of the preferred shares. The K-1 will also state interest and dividends but the K-1 seems to be primarily used to calculate "Partner’s Capital Account Analysis," which might change every year depending on capital returned to you, and UBIT for preferreds held in IRA's and non-profits.

I'm an unemployed factory worker, not a CPA, so caveat emptor. Just guessin' here! My SPLP-A is spread between my TIRA and Roth IRA so no 1099's for me........... In fact it seems that since my UBTI was under a kilobuck, I don't do anything regarding taxes for this MLP issue.

 

[Mulligan]

Found this.



Taxation of Preferred Stock - Finance - Zackshttps://finance.zacks.com › Tax Information › Tax Planning

The 1099-int and 1099-div are from your brokerage house. The K-1 is from the issuer of the preferred shares. The K-1 will also state interest and dividends but the K-1 seems to be primarily used to calculate "Partner’s Capital Account Analysis," which might change every year depending on capital returned to you, and UBIT for preferreds held in IRA's and non-profits.

I'm an unemployed factory worker, not a CPA, so caveat emptor. Just guessin' here! My SPLP-A is spread between my TIRA and Roth IRA so no 1099's for me........... In fact it seems that since my UBTI was under a kilobuck, I don't do anything regarding taxes for this MLP issue.

Ok, I checked and yep my memory was wrong. One 1099 form showed the distribution payments, but it was just FYI and not included in all the numbers in the boxes.

 

[Happyras]

So a question....It seems preferred stocks are in general subject to more inflation than I thought. Issues that are subject to call, are pretty stable compared to those that are not. In general, ETF's like PGX are down 12% YTD, WFCPL down 14%. But MNRPRC which is subject to call, is floating with dividend. Should this continue down a rabbit hole? What more do I need to learn about this risk? It would seem like WFCPL is a stable dividend play with a current yield near 6% (coupon rate of 7.5%), but it keeps getting hammered 1% per day recently in a sell off accelerated since March 1. Anyone have a thought on this?

 

[pb4uski]

It's all interest rate risk and with the prospects of much higher rates I bailed on all my preferreds other than one that is unsalable back in February. I had wanted to bail out earlier but we were camping and had no internet access for a few days and that screwed me up a little.

 

[Happyras]

Yup, I knew better, but was assured by an idiot at the Schwab brokerage that preferred shares were not as sensitive due to higher coupon interest and bank quality risk improvement from higher rates. Got to go now and bail out......

 

[Montecfo]

Yeah these are pretty risky in this environment.

 

[foxfirev5]

IMHO they're no more risky than before. I have about 15% of my fixed income invested in Junk Bonds (VWEAX), EM Bonds (VG EM Bond Admiral) and Preferred (PFFD). The rest for the most part is in my CD/Treasury ladders. Overall similar to many core bond funds at a fraction of the ER. Meanwhile the safe side finances my lifestyle.

I would play in the individual preferred market but I see this as a burden on DW if it comes to that. She can buy treasuries with her eyes closed but there's no need to get fancy.

 

[Mulligan]

Yup, I knew better, but was assured by an idiot at the Schwab brokerage that preferred shares were not as sensitive due to higher coupon interest and bank quality risk improvement from higher rates. Got to go now and bail out......

I truly havent met a smart one yet. One guy who has been in the investment advisory business 30 years had never heard of an IBond before I explained them to him a few months ago….
Yes, perpetuals have high interest rate sensitivity, plus market in general sensitivity. They can act like a bond when you want them to act like a stock, and act like a stock when you want them to act like a bond. There are tricks to mitigate this but you have to be nimble and in the right ones. The above market yield past call perpetuals have held up just fine…Short term duration preferreds have been unaffected, and adjustable with high adjustments to Libor have been all stars. Also an example like this that I own….PLYM-A. Management already stated they are taking it out come first call date first of next year. So it is trading typically now about one divi above par, with 3 divis left. If they reneg, in 2024 its yield moved up 150 bps to 9%. And then 150 more following year until caping out at 11.5%. High motivation to redeem it!
Im still basically all in preferreds and up about 2% on the year. Its been some work and compromising as the ones I typically like are the ones I knew would cave first so I exited those types 4-6 months ago.

 

[foxfirev5]

Yup, I knew better, but was assured by an idiot at the Schwab brokerage that preferred shares were not as sensitive due to higher coupon interest and bank quality risk improvement from higher rates. Got to go now and bail out......

I'll let the comment about taking advice from idiots slide, but I do want to make the point this may not be the time to bail. Why did you buy in the first place? Are you sure interest rates will continue to rise? Particularly longer term rates. Personally I'm holding on to my PFFD (yeah I know it's not cool with the kids here). With that said, DW thinks that preferred stocks only mean that they prefer not to pay you.

 

[Happyras]

Yes on re-assessing the trend in longer term t-bills, I believe the preferreds are following a bond like drop in value based on long duration. The major drop has been directly more associated with the 30 yr rate rise in March over .75% since 3/1, correlating to a 7.5% drop in share value, 10x the rate change. If you believe, somehow, that longer term rates will normalize as short term rates increase, then we will certainly see more yield curve inversion and likely bad juju for the economy. However then maybe then these will not suffer as much as common stock?

 

[Happyras]

Just to note....I was looking at selling a covered call on PFF and PGX today. Thin volumes, and a June 17th call on a $10 strike was $2 bid, $4 ask and not many takers while the shares traded at $12.88 today. It seemed like a nice way to liquidate and keep dividends through June and likely not be called as the price drops below the strike.....If I could have gotten $3 a call, I would have pushed it but my $3.50 sell order did not go...

 

[Montecfo]

IMHO they're no more risky than before. I have about 15% of my fixed income invested in Junk Bonds (VWEAX), EM Bonds (VG EM Bond Admiral) and Preferred (PFFD). The rest for the most part is in my CD/Treasury ladders. Overall similar to many core bond funds at a fraction of the ER. Meanwhile the safe side finances my lifestyle.

I would play in the individual preferred market but I see this as a burden on DW if it comes to that. She can buy treasuries with her eyes closed but there's no need to get fancy.

Well the environment increases the risk.

I've held preferreds in the past but in a rising rate environment, that's kryptonite.

 

[foxfirev5]

Well the environment increases the risk.

I've held preferreds in the past but in a rising rate environment, that's kryptonite.

Perhaps. At this point they are a hedge for me in the event 5-30 year rates do not rise as expected. I fear that as short term rates rise with the Fed, the longer term rates will not rise due to a slowing economy. Anyway if longer term rates rise I have plenty of CD's and Treasuries maturing in the next 5 years. The increase in income would dwarf any setback in PFFD.

 

[pb4uski]

I agree with Montecfo... I'm out until rates increase and stabilize and then I'll reconsider preferreds (which I am a fan of).

 

[Mulligan]

I agree with Montecfo... I'm out until rates increase and stabilize and then I'll reconsider preferreds (which I am a fan of).

Nothing wrong with that strategy. There are issues that actually will benefit from rising rates. Fed Funds increase will correspondingly continue to push Libor up. Issues like CUBI-E which S&P just rated top 3 bank in US in performance of greater than 10 billion. It started as a 6.45% and management talks of redemption a while back. Yet it lives on and just has converted this year to Libor plus 5.14% which is a juicy bank adjustment. There is lag effect here, but with Fed speak this could easily be 7.15% yield come end of year and rising. And its below par now from first floating yield payment which was low 5% as Libor was about zilch from first float payout. Libor is now climbed over 1% since then…. Those are the types one would probably want to steer towards near term if there was any interest in playing.

 

[Slow But Steady]

Good morning, old friends.

I haven't posted here for a good long while. For the most part, I've stopped choosing my own preferreds, instead leaving the choices to an outfit called Stonebridge that works with Schwab. It's less interesting and less fun, but I had a few clinkers that were dragging me down, and Stonebridge is doing well.

I see that a couple weeks back there was a discussion of MLPs like CEQP/PR. I hold CEQP/PR, bought a couple years back for around $6.35. Folks often say that the K-1 forms are a nightmare, but I just finished my taxes, and the K-1 for this one was easy. All the payments were plain dumb income, so no particular benefit from holding an MLP, but not too much added difficulty, either.

Is there any reason I shouldn't continue to hold? I don't really want the capital gains on my 2022 taxes.

 

[Mulligan]

Good morning, old friends.

I haven't posted here for a good long while. For the most part, I've stopped choosing my own preferreds, instead leaving the choices to an outfit called Stonebridge that works with Schwab. It's less interesting and less fun, but I had a few clinkers that were dragging me down, and Stonebridge is doing well.

I see that a couple weeks back there was a discussion of MLPs like CEQP/PR. I hold CEQP/PR, bought a couple years back for around $6.35. Folks often say that the K-1 forms are a nightmare, but I just finished my taxes, and the K-1 for this one was easy. All the payments were plain dumb income, so no particular benefit from holding an MLP, but not too much added difficulty, either.

Is there any reason I shouldn't continue to hold? I don't really want the capital gains on my 2022 taxes.

Hey Slow….No possible guess without knowing the unknowable….Interest rate movements, crisis, market general turmoil… Who knows.. FWIW…The company has IG credit credentials but without IG rating. Why? Because a lot of IG ratings have nothing to do with actual company credit metrics.. Size of company, length history of credit, etc., etc. drag it down. But its metrics are good. Its tied for my second biggest hold now, and I am not selling (I got in low $7s average myself. Quite often I double block in 9.50s or so and dumped over $10 rinse and repeat. More careful now though.
It has been a rock star as many have cratered but this one is still up 10% past year. I see little opp for more cap appreciation, but I dont mind clipping the now 8.8% coupon thats essentially uncallable.
In the spirit of PB’s thinking here is an idea. Start thinking forward and looking to track some that may hit a personal buy zone…Here is an example for me…The $1000 par EIX 5.375% fixed to reset issue.. Since it doesnt reset until 2026 it may trade off present poor yield. It resets to 4.69% plus 5 yr Tbill… I own modest 25 or so shares with about a $1000 blend ave past year.
This is one I want to drop…It wants to hang around $960-$970 now. But Im begging for a drop to $900 to add more. This is a who has the ink pen last scenario given…But at that price even if 5yr was at 0%, you would be looking at a 6% yield in a 0 rate environment. And what if rates shoot higher? Well if 5 yr is 4% at reset, that would reset this around 9.5% QDI. …Thank you sir, may I have another? (An old Fraternity initiation ass beating reference)