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

[hesperus]

"Risk free" and Preferred stock should never be used in the same sentence.

Agreed. Since the market is efficient at pricing risk, higher yields entail greater risk. If I read some of the comments posted here, you'd think one could get 6%-7% yield without much risk. A free lunch. The risk factor seems rarely mentioned here, or at least drowned out. If I believe in efficient markets (and I do), I would say a 6% yield in preferreds is (over the long term) going to be as risky as pretty much any other holding issuing a 6% yield.

 

[Fermion]

Liquidity is probably an issue too. If Mul needed to raise $200K real fast from his preferred stocks, it may be that he would have trouble finding buyers at his ask. I do not know this for a fact though...maybe there are tons of people waiting on the sidelines for a slight bargain.

 

[Mulligan]

Agreed. Since the market is efficient at pricing risk, higher yields entail greater risk. If I read some of the comments posted here, you'd think one could get 6%-7% yield without much risk. A free lunch. The risk factor seems rarely mentioned here, or at least drowned out. If I believe in efficient markets (and I do), I would say a 6% yield in preferreds is (over the long term) going to be as risky as pretty much any other holding issuing a 6% yield.

That certainly is not true at all. The risk as always in anything is ultimately in what anyone will be willing to pay for a purchase and how low anyone is willing to sell..... But by nature of the issue and call date certain ones cannot be efficient. Can you explain why IPL-D yields 4.9% and AILLL yields 6.2%? They are both equal in capital structure, bond ratings, and type of industry.... And yes there is a simple reason...The market cant allow AILLL to be efficient.
And yes certainly 6% is not the same... 6% senior bonds, 6% preferreds, 6% common divis are certainly not the same risk.. Companies that have guaranteed ROE and monopolies do have safety. You really think Chevrons 5.3% common dividend is as safe a yield as an investment grade 6% utility is that is nestled above the payment structure of millions that goes out to the common stock underneath it?
Is it a suitable investment for you? I have no idea as each needs to invest for their own needs. Will these make more than common stocks over an extended period of time? Heck no...I am investing for income not TR, and safe income, so beating the market is not my concern.


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[Mulligan]

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

Liquidity is probably an issue too. If Mul needed to raise $200K real fast from his preferred stocks, it may be that he would have trouble finding buyers at his ask. I do not know this for a fact though...maybe there are tons of people waiting on the sidelines for a slight bargain.

That is a 100% correct, Fermion. But that is my doing. I actually seek mostly illiquid ones as that is where the price discrepancy lies. And I never need my money anyways. I do have a few such as CHSCL that trade thousands daily. But the best ones I have to me are the ones that rarely trade. I have one that has traded 4 times since April 2014... Its present ask price? 1 share is presently available at $1000 and that is it....Its a $100 par stock....


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[hesperus]

Liquidity is probably an issue too.

Yes, that too.
I think one is drinking koolaid if they think that yield is not proportional to risk.
Or, is this a free lunch?

 

[Mulligan]

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

Yes, that too.
I think one is drinking koolaid if they think that yield is not proportional to risk.
Or, are you saying you found a free lunch?

You clearly do not understand these, nor do you understand the capital structure, defensive mechanisms, initial IPO's of issue in conjunction with then current market rate and its effect in relation to current call date. Nor do you understand even the inherent purpose of electrical utility preferreds in relation to what purpose they serve, otherwise you would not have made that comment. Your general comment does not directly apply to this situation.
I am not a world is crashing person, so I believe government issues and CDs are 100% safe, everything else there is always some degree of risk. 70 plus years of continuous T&D utility preferred payouts put me in an area I am very much comfortable with. But I also understand completely the mechanics behind them.
Despite your apparent lack of knowledge behind subject matter, I will use your "free yield" lunch term because I am willing to accept illiquidity and call risk. But this has been stated many times throughout this entire thread, but I am sure you know that.
I am not one to disrespects peoples investment choices, nor have I ever said these were a better investment for others in relation to common stock. This is a preferred stock thread. That is what is discussed here. Instead of throwing out generic 5th grade cerebral comments of "Koolaide drinker" and others, bring something to the table that can refute what has been mentioned and maybe it could be a meaningful conversion as I personally like an intelligent counter argument to any investment thesis I use. But at this point that has not occurred from you.


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[hesperus]

You clearly do not understand these, nor do you understand the capital structure, defensive mechanisms, initial IPO's of issue in conjunction with then current market rate and its effect in relation to current call date. Nor do you understand even the inherent purpose of electrical utility preferreds in relation to what purpose they serve, otherwise you would not have made that comment. Your general comment does not directly apply to this situation.
I am not a world is crashing person, so I believe government issues and CDs are 100% safe, everything else there is always some degree of risk. 70 plus years of continuous T&D utility preferred payouts put me in an area I am very much comfortable with. But I also understand completely the mechanics behind them.
Despite your apparent lack of knowledge behind subject matter, I will use your "free yield" lunch term because I am willing to accept illiquidity and call risk. But this has been stated many times throughout this entire thread, but I am sure you know that.
I am not one to disrespects peoples investment choices, nor have I ever said these were a better investment for others in relation to common stock. This is a preferred stock thread. That is what is discussed here. Instead of throwing out generic 5th grade cerebral comments of "Koolaide drinker" and others, bring something to the table that can refute what has been mentioned and maybe it could be a meaningful conversion as I personally like an intelligent counter argument to any investment thesis I use. But at this point that has not occurred from you.


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LOL. Take a chill pill. I'm not targeting you specifically, but I do take issue with the 'risk free' comments I sometimes see here regarding preferreds. I hold some myself in my portfolio, but I would never create an entire portfolio around them. I don't need to understand your free lunch, or the complexities of it. I understand risk, yield, and markets, and I repeat you are drinking the k'aid if you think that you are getting into a risk free 6%-7% yield. Just don't try to peddle the preferred schtick as risk free. Period. That's all I have to say to your self proclaimed level of 'expertise'.

 

[Mulligan]

LOL. Take a chill pill. You seem to be taking this personally... I'm not targeting you specifically, but I do take issue with the 'risk free' comments I sometimes see here regarding preferreds. I hold some myself in my portfolio, but I would never create an entire portfolio around them. I don't need to understand your free lunch, or the complexities of it. I understand risk, yield, and efficient markets, and I repeat you are drinking the k'aid if you think that you are getting into a risk free 6%-7% yield. Just don't try to peddle the preferred schtick as risk free. Period. That's all I have to say to your level of 'expertise'.

Thanks for the specific counter arguments....Lets discuss them one at a time...Oh wait, there weren't any, never mind.......


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[Coolius]

As in any area of investment, there are both good & bad stocks - low quality & high quality, low yield & high yield. One cannot simply broad brush an entire sector with generalities.

The area of our specific interest in this thread are issues that are in a rather unusual position - either Trapped, or Ring Fenced due to acquisitions, mergers or buyouts. No one is suggesting that there is any "free lunch", just that risks here MIGHT be lower than comparable issues from regular, traditional preferred stocks.

While I appreciate opposing POV from others, I would expect that those who elect to read this thread are well able to decide to ignore, avoid or research further before considering any action. And respect one another, not resort to name calling or sarcasm.

After all, that is what makes a market - one man's treasure is another's garbage.

 

[hesperus]

Well, all I can say is that at least one member here is taking themselves (and their opinion of themselves) a little too seriously. It's a forum, lol

 

[Mulligan]

+1.....It certainly takes all types to make a forum doesn't it!


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[hesperus]

Yes

 

[Lucantes]

Is there any way to participate in preferred stocks, besides evaluating and buying individual ones (such as an ETF or MF with the understanding that there would be some lost value in paying someone else to do the work)?

 

[Mulligan]

Is there any way to participate in preferred stocks, besides evaluating and buying individual ones (such as an ETF or MF with the understanding that there would be some lost value in paying someone else to do the work)?

There are several that usually are index types. There are a few that have like 4.5% loads... I dont know why anyone would buy a load fund. The major ones to look at that I know are PFF, PFXF, SPFF, and PGX. Remember the preferred world is almost 80% financials, so that is what you are going to get in one of these funds...the exception is PFXF which deliberately tilts out of that area. Some times people pair PFXF and PFF together for a little diversity. My dad settled on a PFXF/PFF and a smattering of individual issues.
HOWEVER, the most opportune times to buy preferreds especially a fund type are coming out of a recession where preferred stocks are depressed from a poor economy, or when interest rates are starting to head down or be stable for an extended period of time. We are in a precarious state in guessing interest rates as we kind of are at a fork in the road. And rest assured, if rates would normalize the value of these would drop, and drop hard. If Mr. Market determines a 5% yielder should yield 6%, we are looking at almost $5 loss in capital on a $25 par stock..Ouch!
That is why I pick my own as I am looking for the cushion in "yield trapped" issues if rates would rise.



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[Mulligan]

Is there any way to participate in preferred stocks, besides evaluating and buying individual ones (such as an ETF or MF with the understanding that there would be some lost value in paying someone else to do the work)?

This again is my opinion but I do not like them. Their expense ratios trim down real yield and buying index preferreds is not the same as buying index common stock funds... I own no common stocks and own an index fund instead because "beating the market" is out of my abilities. But "beating the market" in preferreds is rather simple, as all you are looking for is quality for safe income... I have pecked around in their funds, and am not a big fan of some of the issues due to risk. Do to volume and size they have to "buy the market" and buying the market in preferreds is not the same as buying the market in common stocks. Companies that issue preferreds are usually financials needing Tier 1 capital, a tiny amount of utilities, reits, poorly capitalized companies desperate for cash, and companies issuing convertibles that are converted into a common stock at a specific date. I am not interested much in convertibles of a company I don't want to own, and certainly do not want a preferred stock from a company that is issuing preferreds because access to debt market is limited.



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[Dan32]

Risk vs Other Investments (4% SWR)

In regard to some of the comments earlier in the thread, I do believe that there is a place for Preferreds in my portfolio. However, my asset allocation has them currently targeted at 10% of my portfolio (which I don't believe is too high). I would like to hear other's comments on what percent they target for preferred in their asset allocation.

As to preferred safety, I do believe they "safer" than individual common stocks, which I allocate at more than 10% of my portfolio. Although, I'm comfortable with what I'm doing that doesn't mean that I will never make changes in my allocation. That's why I read these message boards.

With regards to that, does anyone use all fixed income instruments (preferreds??) to determine their safe withdrawal rate?

Due to inflation (I assume 3%), you would need an ~5% return to survive 30 years with 2 downsides. 1. At the end, you would have no principal left. 2. When inflation starts to require that you sell some of your preferreds, they may be below par which would deplete your account faster than calculated.

 

[Mulligan]

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

In regard to some of the comments earlier in the thread, I do believe that there is a place for Preferreds in my portfolio. However, my asset allocation has them currently targeted at 10% of my portfolio (which I don't believe is too high). I would like to hear other's comments on what percent they target for preferred in their asset allocation.



As to preferred safety, I do believe they "safer" than individual common stocks, which I allocate at more than 10% of my portfolio. Although, I'm comfortable with what I'm doing that doesn't mean that I will never make changes in my allocation. That's why I read these message boards.



With regards to that, does anyone use all fixed income instruments (preferreds??) to determine their safe withdrawal rate?



Due to inflation (I assume 3%), you would need an ~5% return to survive 30 years with 2 downsides. 1. At the end, you would have no principal left. 2. When inflation starts to require that you sell some of your preferreds, they may be below par which would deplete your account faster than calculated.

Dan, from readings of professional money manager experts, you are spot on where you probably want to be in a suitable balanced portfolio. A person with an "aggressive" portfolio would stretch to 20%.
Sorry, I can't offer a personal example on your withdrawal question as I just reinvest all my dividends. Now some people on income forums I have read do this....They take the amount of dividends that mirrors their planned withdrawal rate and reinvest the difference. In other words if their withdrawal rate is 4% and dividend yield is 6%, they withdraw 4% of the dividend and reinvest the other 2%. Whether that is sound advise I really do not have an opinion, because withdraw rates are nothing I have really studied or ever used.


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[Slow But Steady]

Mulligan:

Are you buying more AHT-D? I see it's trading under $24 today.

Their common shares have been plastered, so I'm thinking about gritting my teeth and buying more of both.

 

[Mulligan]

Mulligan:

Are you buying more AHT-D? I see it's trading under $24 today.

Their common shares have been plastered, so I'm thinking about gritting my teeth and buying more of both.

Hello Slow, I only had a few hundred shares and sold out this morning at $24.84. Counting my accrued dividend I came out a few tiny bucks ahead as I bought at $25.08. I have heard that a similar high end hospitality reit announced poor earnings so Im guessing its a sympathy drop. As I have just been corresponding about selling AHT-D with Coolius this morning. Personally I think it is a bit like a play on oil now. Somebody could make a lot of money at this point, or lose too. AHT-D may go right back up or sink to a 12% yield but still continue to pay every dividend. But I have heard nothing bad that has come out of AHT. Insiders did buy quit a bit of common about a month or two ago. But ....who knows...
I have tried to branch out several times, and have failed miserably each time...Not in losing any money, but ability to branch out and diversify. I am just not cut out for it.... It appears I will have to accept the fact my little sandbox is utilities with a small sprinkling of banks and insurance if the price is right.


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[Coolius]

Mulligan:

Are you buying more AHT-D? I see it's trading under $24 today.

Their common shares have been plastered, so I'm thinking about gritting my teeth and buying more of both.

Looks like a lot of the specialty Finance REITS are getting hit hard today. Their preferreds are also being whacked.

Not sure what's happening, I have a small position which I will hold, but will sell as and when AHT-D recovers. I recognized the risk when I bought, so will have to ride along for better or for worse.

 

[Mulligan]

Wow, Slow...I just checked...It is getting routed...It started acting funny yesterday, so that triggered me out. A very knowledgable but aggressive investor liked these, so I tip toed in with both eyes open.
This is why I prefer old quality investment grade 6% ones issued when treasury yield was 4-5%. They are trapped roughly near their issue par price because of call risk keeps them from floating way above par price to reflect their true current yield standing.


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[Mulligan]

Looks like a lot of the specialty Finance REITS are getting hit hard today. Their preferreds are also being whacked.

Not sure what's happening, I have a small position which I will hold, but will sell as and when AHT-D recovers. I recognized the risk when I bought, so will have to ride along for better or for worse.

Are those Mreits getting rocked too? I never understood or trusted them. I am a simple man granted, but if I read something one time and dont even begin to understand the slightest in how they work, I stay away no matter what the prospects are....


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[Running_Man]

On CNBC the finance analyst was talking about how the hotel industry was not yet taking into account that the oil decline is killing this industry and risking bankruptcy's and the risk to regional banks as a result of that. I think anything in this area is now getting killed as a result of this.

 

[Coolius]

It looks like the dumping is concentrated on AHT preferreds. Even the common is not as badly down ( "only -4% ).

Other specialty REIT Preferreds are down, but in the range of 2-3%, nowhere near the 6-7% drop of AHT preferreds.

Absolutely no news that I can find. Very strange indeed, unless there's some hidden news yet to be released.

 

[Mulligan]

On CNBC the finance analyst was talking about how the hotel industry was not yet taking into account that the oil decline is killing this industry and risking bankruptcy's and the risk to regional banks as a result of that. I think anything in this area is now getting killed as a result of this.

Shoot now, and ask questions later maybe? That darn oil is trying to reach its tentacles into other things and drag them down, too apparently.


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