Author Topic: Preferred Stock  (Read 4871 times)

TreeTired

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Preferred Stock
« on: April 08, 2014, 12:24:44 PM »
In the past I have only purchased preferred stock if I thought it was a "special situation", ie for a trade.

Recently (over the last 6 months)  I have been buying preferred stock (and some exchange traded debt) for income. I was lucky enough to have built up a dividend stock portfolio since 2008,  and many of the stocks that I purchased for their 4 and 5% yields are now yielding 3% (and I have unrealized capital gains).    I like the idea of getting a 6% or 7% yield from a strong company,  or even a higher yield from a shakier company.  This is an allocation;  I am not moving everything out of common stocks into preferred.   So far I own,   MWR,  DUKH (debt),  RBS.PI,  CWH.PD,  AGM.PD (recent purchase), and STI.PE.      Some of these have moved up in price since purchase.  I bought and sold CPA.PA without even receiving a fat 10% dividend because the price ran up to my target. 

Just wondering if anyone else is using preferred stock to generate income in their portfolio.  If the dividends are eligible for 15% tax treatment I hold them in my brokerage account.  If not, like the exchange traded debt, they go in my IRA.

rayt168

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Re: Preferred Stock
« Reply #1 on: April 08, 2014, 12:34:37 PM »
I have a preferred stock ETF PFF (iShares U.S. Preferred Stock ETF).  I have the ETF in my IRA for income purposes. 

soccerluvof4

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Re: Preferred Stock
« Reply #2 on: April 08, 2014, 05:15:54 PM »
I am not into any preferred right now but if your looking for high safe yielders obviously do your own research but I think BBEP with its nearly 10% dividend on its common  and 14 year payout,  and track record speaks volumes plus you have the opportunity of growth. I can name many in Common shares if your interested but again not recommendations just names for you to do your own research.  I will circle back if that interests you .

KingCoin

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Re: Preferred Stock
« Reply #3 on: April 08, 2014, 07:18:37 PM »
As a constituent of a portfolio, they're kind of lousy. They're very negatively convex, with limited upside(they're usually call constrained) and considerable downside (0 recovery in bankruptcy). Unlike treasuries and senior/secured bonds, they don't work well as a diversifier to equity. Nor do they perform as well as equity in a bull market (especially if we rally from here).

If you're just searching for yield, I guess you don't have many good options. I'd probably consider some secured real estate assets (unlevered or lightly levered) for a long term buy and hold. At least you're inflation protected and have recovery value if things go wrong.

I own a lot of exotic fixed income paper, but I keep my finger close to the eject button. If the market sells off, preferreds will get hammered. If the market rallies, your returns will be tepid. You're really hoping for a lazy, low vol, sideways market.

rl2

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Re: Preferred Stock
« Reply #4 on: April 17, 2014, 03:04:18 PM »
The yields seemed intriguing to me, however I found the risk/reward ratio isn't great. Good explanation from Larry Swedroe:

http://www.cbsnews.com/news/why-you-should-avoid-preferred-stocks/

TreeTired

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Re: Preferred Stock
« Reply #5 on: April 24, 2014, 05:32:56 PM »
Thanks for that link.   Very good article.   (I almost replied to another thread someone else started asking about preferred shares)

I was aware of all of the risks and felt the yield was great enough to compensate me for those risks.   Now I am re-thinking that.  Might take profits and get out of the shares I have purchased.  I think they are all at a profit, but that is most likely the weak correlation between preferred and common while long term interest rates have actually declined recently.    I didn't realize that preferred stock was tax advantaged for corporate buyers, which pushes the yield down for individual buyers. 

spoonman

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Re: Preferred Stock
« Reply #6 on: April 26, 2014, 03:48:45 PM »
I think you may want to check out some really nice articles at Seeking Alpha by a woman name "Five Plus Investor" (formerly known as YoYoMama).  She's written some really nice articles on many aspects of preferred stocks.

Here's an example:

http://seekingalpha.com/article/265702-sleep-at-night-investments-utility-preferred-shares

clifp

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Re: Preferred Stock
« Reply #7 on: April 26, 2014, 06:00:38 PM »
Thanks for that link.   Very good article.   (I almost replied to another thread someone else started asking about preferred shares)

I was aware of all of the risks and felt the yield was great enough to compensate me for those risks.   Now I am re-thinking that.  Might take profits and get out of the shares I have purchased.  I think they are all at a profit, but that is most likely the weak correlation between preferred and common while long term interest rates have actually declined recently.    I didn't realize that preferred stock was tax advantaged for corporate buyers, which pushes the yield down for individual buyers.


The largest issuers of preferred are banks, and I think banks are somewhat the exception to the rule that preferred isn't something that good companies issue. The regulator rules encourage banks to issue them.  Obviously there is huge interest rate risk associated with preferred as you know.  But I and others have been confidently predicting a large rise in interest rates for 4 or 5 years now and other than 1% rise (some of which has been reversed recently) last year, we have been consistently wrong.

I personally prefer the common stock of banks to preferred since there is a lot of opportunity for dividend growth. WFC raised their 16.7% this year and it is now at an all time high.
That said it you're chasing yield there are probably worse places to chase it like junk bonds.
« Last Edit: April 26, 2014, 06:10:31 PM by clifp »

AssetGrinder

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Re: Preferred Stock
« Reply #8 on: June 11, 2014, 03:43:05 PM »
The only way I would invest into preferred stock is through an ETF as well. There you will have much more access and be less susceptible to individual stock fluctuations. The Ishares preffered stock Etf is yielding above 5% and seems like a solid choice. 

Cyrano

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Re: Preferred Stock
« Reply #9 on: June 12, 2014, 04:42:44 AM »
Preferred stock has preferential tax treatment in the US corporate tax code but not the US individual tax code. So because the market has priced in a tax break that other market participants get but individuals do not, in the absence of some exceptional factor the individual should assume preferred stock is overpriced for them.

ivyhedge

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Re: Preferred Stock
« Reply #10 on: June 12, 2014, 02:14:38 PM »
Please don't just buy preferreds for yield: engage a specific thesis. (After all, your equities' yields are down but your yields-on-cost are up.)


We bought many preferreds during the meltdown and realized tens, to hundreds, of percentage points of gains on issues that folks left for dead - and that have since been called.  And even though they were "debt-like", it didn't mean that they couldn't end up like those from ML, LEH, and BS.


I buy *only* under the call price and *only* cumulative issues. I have used the distributions and cap gains to fund swaths of investments, with better r/r ratios, in our retirement accounts.