Author Topic: What's your take on preferred shares?  (Read 4582 times)

Retired To Win

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What's your take on preferred shares?
« on: June 15, 2015, 11:23:40 AM »
I like preferred shares for their higher-priority set dividend, as long as the particular stock issue is cumulative, nonconvertible and only callable into cash.  I don't like that there's almost no chance of scoring any kind of a capital gain on the shares.  But bottom line I find them a good addition to my dividend-focused stock portfolio.

I've already decided against the argument that strongly favors total return index investing and opposes any kind of individual equity holding.  So, setting that aside, in the context of an individual equity portfolio, what do you think about preferred shares?

Tremeroy

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Re: What's your take on preferred shares?
« Reply #1 on: June 15, 2015, 11:38:05 AM »
When you say "nonconvertible," do you only mean that the company is unable to convert the shares into common?

If I were selecting a preferred issuance, I would certainly want the option to convert at a fixed ratio into common shares—otherwise my preferred shares wouldn't share in any of the upside of the company's performance & would instead have a return function that mirrored the company's bonds (with a weaker credit structure, no priory in bankruptcy, etc.).

NorCal

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Re: What's your take on preferred shares?
« Reply #2 on: June 15, 2015, 12:23:33 PM »
I keep a small amount of preferred shares in my portfolio.

I think they should be considered part of your fixed income allocation, as their risk/return characteristics are much closer to high-yield bonds than equities.  This is my mental classification for them, and I realize other people think about them differently.

I wouldn't hold them in a portfolio smaller than $100-$200K, just because you'd get better fixed income diversification from an aggregate bond fund.  In larger portfolios, it can pay to tailor your fixed income portfolio profile.  Particularly since fixed income securities have a LOT more variability in structure and risks than typical equity investments.

brooklynguy

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Re: What's your take on preferred shares?
« Reply #3 on: June 15, 2015, 12:43:13 PM »
I agree with NorCal -- your typical plain-vanilla nonconvertible preferred stock is much more debt-like than equity-like, and it is almost a contradiction in terms to consider them "in the context of an individual equity portfolio."  RtW, I get that you are trying to sidestep the passive vs. active investing debate, but I think it's actually the "total return" aspect of the argument you proclaim to have rejected (and have put into practice by focusing on dividends in your stock selection) that is the crux of the matter.  That focus on dividends (which I and many other denizens of Investor Alley would argue makes no sense) has apparently led you to seek out inherently debt-like instruments for the desired equity allocation of your portfolio, which I would also say makes no sense.

Financial.Velociraptor

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Re: What's your take on preferred shares?
« Reply #4 on: June 15, 2015, 05:12:17 PM »
Back of the napkin analysis shows I have a hair over 5% of my portfolio in preferreds yielding roughly 8% on cost and less than a point in net capital gains.  I'm much higher on closed end municipal bond funds such as NIO and NEA at the moment for new money and will not be adding any preferred at least until that hits 20%.

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Re: What's your take on preferred shares?
« Reply #5 on: June 15, 2015, 07:08:19 PM »
With preferreds you have bond-like interest rate risk and not as much upside as pure stock equity plays. 

Why not just hold some bonds and stocks?

Retired To Win

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Re: What's your take on preferred shares?
« Reply #6 on: June 16, 2015, 11:03:27 AM »
When you say "nonconvertible," do you only mean that the company is unable to convert the shares into common?

If I were selecting a preferred issuance, I would certainly want the option to convert at a fixed ratio into common shares—otherwise my preferred shares wouldn't share in any of the upside of the company's performance & would instead have a return function that mirrored the company's bonds (with a weaker credit structure, no priory in bankruptcy, etc.).

My research indicates that it is the company that gets the option to convert preferred into common shares.  I wouldn't foresee company management doing that in order to benefit the preferred shareholders.  Quite the opposite.  My expectable scenario would be that company management would decide not to keep paying the preferred dividend (for which there can be a host of reasons) and, in order to be able to do that, would convert the preferred shares into common (which presumably would at such a point not be paying a dividend either).  And, to add insult to injury, it would be highly likely that the market value of the common shares proferred would not match the original cost of the preferred shares.

So, no thank you, I will only consider nonconvertible preferred shares.

Can anyone present examples of such a conversion turning out to be profitable to the preferred share ex-holders?

brooklynguy

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Re: What's your take on preferred shares?
« Reply #7 on: June 16, 2015, 11:54:41 AM »
My research indicates that it is the company that gets the option to convert preferred into common shares.

It depends on the terms of the specific shares in question (which may allow conversion at the option of the shareholder or at the option of the issuer), but, in my experience, a reference to "convertible preferred shares" (without further detail) is generally understood to mean convertible at the option of the shareholder, not the issuer.

TreeTired

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Re: What's your take on preferred shares?
« Reply #8 on: June 16, 2015, 02:23:31 PM »
I have some preferred stock.   I buy them for income.   Most have done pretty well.   Somebody on here made a very strong case against preferred stock a while back that convinced me I should lighten up on that asset class,  but so far I have not.

Issues I own.   HCAPL,  WFC.PT (biggest holding) ,   MWR,   THGA,  AGM.PB,   STI.PE,  NM.PH (my one dog),  JPM.PB

NorCal

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Re: What's your take on preferred shares?
« Reply #9 on: June 16, 2015, 05:43:14 PM »
If investing in the category, I would recommend a preferred shares fund (I use PFF) unless you have a truly massive portfolio.  Diversification benefits are important.

regulator

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Re: What's your take on preferred shares?
« Reply #10 on: June 16, 2015, 09:07:57 PM »
They scare the crap out of me at this point in the cycle. Tons of interest rate risk in a rising rate environment.  Oodles of credit risk in a time of low spreads.  Callable by the issuer after a few years if the trade actually goes your way.  No meaningful protection for you as a creditor.  Pass.

5 to 7 years ago they were a great buy in a distressed market.  Today, not so much.

innerscorecard

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Re: What's your take on preferred shares?
« Reply #11 on: June 16, 2015, 09:50:19 PM »
I do not like them as a rule, because since individuals do not get the favorable tax treatment (dividend received deduction) on them that corporations get, they should generally be overpriced for individual investors if one assumes they are efficiently priced for corporate buyers.

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Re: What's your take on preferred shares?
« Reply #12 on: June 17, 2015, 04:29:37 PM »
They scare the crap out of me at this point in the cycle. Tons of interest rate risk in a rising rate environmentOodles of credit risk in a time of low spreads. Callable by the issuer after a few years if the trade actually goes your wayNo meaningful protection for you as a creditor.  Pass.

5 to 7 years ago they were a great buy in a distressed market.  Today, not so much.

Oyvey, that's one hell of a list of negatives.  You do bring up some valid concerns.  Except for the interest risk one, I try to finesse my way around the minefield by doing the best due diligence I can before plunking down my money.

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Re: What's your take on preferred shares?
« Reply #13 on: June 22, 2015, 06:13:21 PM »
If investing in the category, I would recommend a preferred shares fund (I use PFF) unless you have a truly massive portfolio.  Diversification benefits are important.

Why?

What would you consider a massive portfolio?

NorCal

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Re: What's your take on preferred shares?
« Reply #14 on: June 23, 2015, 09:20:32 AM »
If investing in the category, I would recommend a preferred shares fund (I use PFF) unless you have a truly massive portfolio.  Diversification benefits are important.

Why?

What would you consider a massive portfolio?

Diversification

By holding a fund, you reduce your issuer specific risk.  By holding stock (preferred or otherwise) in a single company, there is always the risk that a dividend will get cut, bankruptcy, etc.  A fund reduces/mostly eliminates this risk by spreading your holdings.

While I'd personally probably still use a fund for a large portfolio, the cost-benefit analysis would probably occur when your portfolio is large enough to consider 10-20 individual preferred issues. 

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Re: What's your take on preferred shares?
« Reply #15 on: June 23, 2015, 06:57:46 PM »
5-year return is less than VTI and with VTI you get almost 3,000 more stocks.

With preferreds you have less upside than common stocks and interest rate bond-like risk.

So why preferreds again?