Seeking Alpha
Long only, value, special situations, preferred stocks
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Summary

  • Attempt to time the market was an error.
  • Dividend paying stocks can ease the pain of stock price variation.
  • Investor psychology can have a greater impact on prices than interest rates or the economy.

Last May I wrote an article on leaving the stock market in May and returning in October. In that article I developed a plan to sell most of my holdings and leave ½ of my portfolio in cash. The other half of my portfolio was to be invested in preferred issues and a few other dividend stocks in which I had confidence. The preferred issues are listed below with the market price at the time the article was written:

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

I had hoped to be able to sell these stocks in October at around the same price that I purchased them to be able to get back into common stocks. If you followed my lead and advice, you would have been distressed. It is one of the worst calls I have made since writing on Seeking Alpha. I am still holding many of these preferred issues because the prices dropped precipitously over the summer. Since the Fed was threatening to end QE III, that is, it was going to stop buying bonds to hold down interest rates, investors in preferred stocks panicked and sold out in droves. Investor fears and psychology drove the prices down rather the actual changes in interest rates and changes in the economy. Below are a series of graphs to show what happened to these preferred issues:

The first is ABR-B, the B preferred of Arbor Realty Trust (NYSE:ABR). If one would have purchased this preferred in May and sold in October, one would have had a $2.00 capital loss. As you may have guessed, I am still holding these shares. I have collected over $2.00 in dividends, but continue to hold on to collect more since it is paying over 8% at the current market price.

(click to enlarge)

The second is ARR-B, the B preferred of Armour Residential REIT, Inc. (NYSE:ARR). The price at publication was $25.18 and the price in October swooned to $21.00; a $4.00 capital loss. This is another preferred stock that I continue to hold in my portfolio. The current price is around $24.50 and I could get out intact since it has paid nearly $2.00 in dividends. But I am continuing to hold since the stock pays me 8% with a $ 0.164 monthly payout.

(click to enlarge)

The next issue is BEE-C, the C preferred of Strategic Hotels & Resorts, Inc. (NYSE:BEE). The price at publication was $25.09 and by October it was down to $22.70 per share. Selling in October would have given one a $2.40 capital loss. Rather than do that, I kept the stock until it reached $25.20 in March of this year to break even while capturing over $2.00 in dividends.

(click to enlarge)

The next preferred issue was CYS-B, the B preferred of CYS Investments, Inc. (NYSE:CYS). The price at publication was $24.87 per share and descended to $20.50 in October. This represents a capital loss of $4.37. I am still holding this preferred stock and watched it get as low as $19.50 per share. When it got that low it would have been a great time to buy it. It is now selling around $23.25 per share. At this price this preferred issue is offering close to an 8% return.

(click to enlarge)

The next issue on the chart is DDR-K, the K preferred of DDR Corp. (NYSE:DDR). It was selling for $25.00 per share at the time of the article. By October it was down to $21.00 per share with a $4.00 capital loss. I am still holding this preferred issue with a selling price of $23.80 per share. When the issue reached $22.00, I doubled up on the issue and now stand at a small capital loss. I am getting an average return of around 7% on my investment.

(click to enlarge)

The graph below really illustrates how badly these stocks did when compared to the Dow Jones Industrial Average. There are 3 lines; the yellow line shows the trajectory of the Dow Jones, the white line the trajectory of ABR-B, and the blue line the trajectory of ARR-B. My attempt to time the market was a complete bust. I would have been better off not to sell my common stocks and let them ride through the summer. Furthermore, my purchases of preferred issues suffered huge capital losses through October.

(click to enlarge)

(All of the above graphs were taken from Interactive Brokers)

The graphs above offer a good overview of the losses all of the other preferred stocks suffered from May to October and then the rebound from October to now. Below is a chart which depicts the prices of all the preferred stocks mentioned in the article from May to October and as well as what they are today.

Symbol

Company Symbol

May 2013 Price

October Price

Capital Loss

Current Price

Current Dividend Return

ABR-B

ABR

$25.00

$23.00

$2.00

$23.75

8.1%

ARR-B

ARR

$25.18

$21.00

$4.18

$24.30

8.1%

BEE-C

BEE

$25.09

$22.70

$2.39

$25.51

8.0%

CYS-B

CYS

$24.87

$20.50

$4.37

$23.20

8.1%

DDR-K

DDR

$25.00

$21.00

$4.00

$23.80

6.5%

DLR-G

DLR

$25.03

$19.50

$5.53

$22.20

6.6%

FCH-A

FCH

24.83

$23.30

$1.53

$25.05

7.8%

LHO-I

LHO

25.50

$20.50

$5.00

$24.00

6.6%

MITT-B

MITT

25.62

$22.50

$3.12

$24.64

8.1%

NLY-D

NLY

26.18

$23.75

$2.43

$24.40

7.7%

NRF-D

NRF

25.14

$24.00

$1.14

$24.75

8.5%

OFG-A

OFG

25.11

$21.75

$3.36

$24.02

7.4%

PSA-W

PSA

25.35

$19.75

$5.60

$22.30

5.8%

RAS-C

RAS

25.76

$25.15

$0.61

$25.61

8.6%

RBS-T

RBS

25.26

$23.50

$1.76

$25.52

7%

RSO-B

RSO

24.99

$23.00

$1.99

$23.25

8.8%

STAR-I*

STAR

24.85

$22.50

$2.35

$24.50

7.6%

SPPRP

SPPR

9.97

$9.50

$0.47

$4.54**

0%

* Previously SFI-I

** Dividend payments have been suspended

The chart shows that my attempt to time the market by getting out of common stocks and investing in preferred stocks was a bust. I kept most of the preferred issues that I purchased last May and June till now. I was fortunate enough to see the problems at SPPR before they discontinued the dividend and got out before the floor fell through.

However, my foray into preferred stocks was not a complete bust because I held on to them and collected the dividends while waiting for them to rebound. I did take advantage of the swoon in prices to double up on many of them at much lower prices and now have capital gains on some of these issues. Others I have sold out recently at a profit.

Conclusion:

My attempt to time the market by switching out of common stocks to preferred stocks to miss the summer plunge was a definite mistake. I would have been much better off putting my money on the sideline completely or to let the common stocks ride over last summer. There are several lessons to learn from this:

  1. I have no ability to time the market and should give up these futile attempts.
  2. Dividends steadily coming in from one's investments can ease the pain of price variations of one's holdings and allow one to hold on for the rebound.
  3. Investor psychology can have a greater impact on stock prices than actual changes in the economy and interest rates.

Here I am into another May. I am not making any major moves with any of my holdings except to keep about 1/3 of my money aside for the possibility of purchasing some good dividend paying stocks at a discount sometime over the next 4 months.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Saved By The Dividends... My Busted Attempt At Timing The Market

Additional disclosure: I have positions in ABR-B, ARR-B, CYS-B, DDR-K, DLR-G, LHO-I, MITT-B, NLY-D, OFG-A, PSA-W, RSO-B, STAR-I.