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Long only, value, special situations, preferred stocks
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There was a recent article about Sell in May and go away, which recommends selling one's stocks in May and reentering the market in October. This article maintains that over the past five years this strategy has worked reasonably well. My personal experience agrees with this maxim. It makes sense to reduce one's holdings in May and get back into the market in the fall since stocks often decline over the summer and then begin to revive again in the fall.

If one sells in May, than what? That is the conundrum of a retired person who needs cash coming in steadily to finance one's new car and to pay for one's prescriptions. My answer to this dilemma was to buy preferred stocks that keep the cash coming while I wait till October or November to buy back into the market.

Over the past two weeks while the market was hitting brand new highs, I sold most of my dividend growth stocks. Since most of them appreciated considerably since October of last year, it seemed prudent to sell them and harvest the profits. I held on to a few of my dividend growth stocks such as Mercury General Corp. (NYSE:MCY), CVR Refining LP (NYSE:CVRR), VOC Energy Trust (NYSE:VOC), Univest Corp. of Pennsylvania (NASDAQ:UVSP), Bank of McKenney, Virginia (OTCQB:BOMK) and Harleysville Savings Financial Corp. (OTCQX:HARL). I kept these issues because they provide excellent dividends and also because I am confident their stock prices will hold up even during a market drop.

After selling all of the other securities, I made a decision to keep one-half of my portfolio in cash to be ready reenter the market quickly in the event of downdraft. On the other hand I began a search of preferred stocks for purchase to keep the cash coming to support my lifestyle. Below are the conditions I used in choosing the preferred stocks to buy:

  • Viability of the company
    • Wanted to be reasonably sure the company was going to pay the dividend and survive while holding the stock.
  • Liquidation price of the preferred stock
    • Make sure that issue is not priced too high over the liquidation price because if the company calls the issue, one only gets the liquidation price, not the market price.
  • Call date or maturity date of the preferred
    • Make sure that the maturity or call date is sometime in the future unless the purchase price of the stock is less than the liquidation price.
    • If the purchase or market price of the preferred is higher than the liquidation price, calculate the rate of return based upon the call date of the issue to make sure it provides an acceptable rate of return.
  • Coupon rate of the preferred stock
    • Make sure the rate of return is at least 5% on investment.
    • After finding the coupon rate, one must also check the market price of the issue and calculate the rate of return based upon the market price.
  • Tax preference of the preferred
    • Some preferred issues are eligible for the 15% tax rate. If it is eligible for the reduced tax rate, this issue would be good for an account that is not tax protected.
    • Most preferred issues are not eligible for the 15% tax rate. This is not important if one places it in a tax protected account such as an IRA.
  • Is the dividend cumulative?
    • Cumulative dividends mean that if the company for one reason or another stops paying the preferred dividend, the dividend must be paid at some future time before any dividend can be paid to the common stock. This feature provides an extra level of protection.
  • Does the issue have a conversion feature?
    • Some preferred stocks have a conversion feature.
    • Some issues make the conversion feature mandatory, others give the owner discretion to make a conversion.
      • Mandatory conversions may or may not be in the best interests of the issue's owner. The conditions of the conversion must be considered carefully
      • Non-mandatory conversions usually allow the owner of the issue to participate at some level in the price rise of the common stock.

I considered these issues in order to retain capital. When a preferred stock is called or when I wish to sell it to invest in other issues, I hope to get my investment back in full. Below is a list of the preferred issues that I chose to place in my portfolio: (Some of the issues were purchased at lower prices than shown below. Prices shown were taken at about 2:00 PM on 5/15/2013.)

Symbol

Coupon Rate

Call Price

Call Date

Cum

Conv

Market Price

15%

ABR-B

7.75%

$25.00

5/09/2018

Yes

No

$25.00

No

ARR-B

7.85%

$25.00

02/12/2018

Yes

No

$25.18

No

BEE-C

8.25%

$25.00

05/17/2011

Yes

No

$25.09

No

CYS-B

7.50%

$25.00

04/30/2018

Yes

No

$24.87

No

DDR-K

6.25%

$25.00

04/19/2018

Yes

No

$25.00

No

DLR-G

5.88%

$25.00

04/09/2018

Yes

No

$25.03

No

FCH-A

7.80%

$25.00

04/30/2001

Yes

Yes

$24.83

No

LHO-I

6.38%

$25.00

03/04/2018

Yes

No

$25.50

No

MITT-B

8.00%

$25.00

09/27/2017

Yes

No

$25.62

No

NLY-D

7.50%

$25.00

09/13/2017

Yes

No

$26.18

No

NRF-D

8.50%

$25.00

04/10/2018

Yes

No

$25.14

No

OFG-A

7.13%

$25.00

05/30/2006

No

No

$25.11

Yes

PSA-W

5.20%

$25.00

01/16/2018

Yes

No

$25.35

No

RAS-C

8.88%

$25.00

07/05/2012

Yes

No

$25.76

No

RBS-T

7.25%

$25.00

12/31/2012

No

No

$25.26

Yes

RSO-B

8.25%

$25.00

10/02/2017

Yes

No

$24.99

No

SFI-I

7.5%

$25.00

03/01/2009

Yes

No

$24.85

No

SPPRP

8.00%

$10.00

01/01/2011

Yes

Yes

$9.97

No

Table Notes: Cum = Cumulative Dividend; Conv = Convertible Stock

Since I desire to leave one-half of my portfolio in cash to take advantage of a possible downdraft, the goal of these holdings is to provide a total 4% return on my portfolio while attempting to minimize possible losses of capital. This allows me to collect a rate of return greater than the rate of inflation and also have money coming in to spend while I wait to place my money in other issues. If you research these issues, you will find that there is a certain amount of risk in these securities. I am not investing in these issues for the long term and consider the risk minimal for the short time I plan to hold them.

Conclusion

If you think that the summer will bring the doldrums to the stock market, then you might want to consider doing something similar. There are many other preferred stocks available and new ones are being issued weekly. A good collection of information on preferred issues is listed at QuantomOnline.com. It was the source for much of the information summarized in the table above.

Disclosure: I am long every stock and preferred stock listed in the article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Go Away In May And Then What?