Doug K. Le Du

Newsletter provider, dividend investing, author, preferred stock researcher
Doug K. Le Du
Newsletter provider, dividend investing, author, preferred stock researcher
Contributor since: 2011
Company: Preferred Stock Investing
The high quality preferred stocks that are the subject of this article reflect the performance you are asking about (same securities). Thanks for posting.
Good point Kaptain. There are many reasons that a company would choose not to have its debt and preferreds rated. For those willing to look into such companies a bit, keeping your own risk tolerance, goals and resources in mind, there are certainly solid opportunities available. Thanks for posting.
Thanks for the thoughtful post John and for your support of my subscription service. You make several great points and as rates rise, we should see many excellent new preferred stock introductions paying higher dividends very soon.
Interesting point. Thanks for sharing with our readers.
Due to their known dividend return and par value, preferred stocks have much less volatility than common shares. With less volatility, there is less 'wiggle room' for those trying to use preferreds to capture a value gain. Consequently, performance based on value gain/loss metrics, as you mention, is usually underwhelming. For data, see "Preferred Stock: Less Volatility, Better Principal Protection, Higher Returns At Lower Risk" here:
Informed individuals who build their own portfolio will usually do better than a preferred stock ETF (by better I mean high return at lower risk). One reason is that the investment objectives of an income investor buying shares of a preferred stock ETF are completely different than, and entirely disconnected from, those managing the ETF. Where income investors are investing for steady, reliable income, the objective of the ETF manager is to manipulate the holdings within the fund such that the share price of the ETF matches the daily movement of an index - the two objectives have nothing to do with one another whatsoever. The primary benefit of a preferred stock ETF is convenience. See "Preferred Stock ETFs: The Downside That Preferred Stock Investors Can Avoid" here:
Thanks for posting.
Glad the OTC strategy worked well for you. Once rates head up and prices back down, you won't need to use the OTC strategy to find sub-$25 opportunities, but in the meantime doing so remains a viable approach. Thanks for posting.
When one considers the alternatives available to income investors, high quality preferreds continue to offer benefits that outpace many of the alternatives. Glad they are working out for you. Thanks for posting.
It's been a long wait for 7.1% to return to us, but I think it is fair to say that we are closer now than we have been in a long time. Thanks Bruce.
Thanks for taking the time to post.
GSJ, an investment grade-rated ETDS (a bond), met the sampling requirements for HQ preferreds and was part of the data set for this article. GSJ is trading today at $26.04 with a current yield of 6.24% and a YTC of 2.86%.
GS-B is a speculative grade-rated preferred stock and therefore does not meet the "high-quality" definition I use here.
But by mentioning that GS-B is trading above par, it sounds like you may be thinking that my mentioning specific securities here is some type of recommendation to readers. Please remember that this article (and all of my other articles that you see here and elsewhere) is not trying to suggest that investors should consider buying any of the securities mentioned. More than that, it is not possible for me or any other writer, pundit or commentator, to make buy/sell recommendations without knowing the reader's goals, resources and risk tolerance (which is why doing so is illegal in the United States). Please do not interpret my mentioning of GS securities here because I think you should buy them.
While we see such recommendations every day (including within the reader comments of this article), it is completely irresponsible (and illegal) to do so.
There is no attempt here to suggest that readers should buy (or not buy) any of the securities that are mentioned. And you are absolutely correct that during a period of low rates/high prices, preferred stock buyers should use the wholesale OTC exchange to purchase shares for below-par prices (if you view my article list here at SA you will find at least half a dozen articles on how to do this over the last few years while such conditions have persisted).
Regarding std dev would be greater than .3 for preferreds with a more distant call date: This is a great point - volatility is affected by the proximity of the call date and the expectations of market participants with respect to the likelihood of a redemption. But since the known return and known par value of preferreds produce less volatility than common equity, which is the subject of this article, the conclusion reached here would not change.
Thanks for posting.
Regarding performance over a longer period: the current (fifth) edition of my book, Preferred Stock Investing, presents preferred stock performance for every qualifying security issued since January 2001. That data may be of interest to you. Also, my SA articles published here since October 2011 are focused entirely on preferred securities and provide quite of bit of data over many time periods that you might find interesting.
Regarding volatility comparisons: Because preferreds have a known return and a published par value, the time frame for this analysis does not change the result. These two characteristics of preferreds, which are absent from common equity, produce less price fluctuation, regardless of the time frame over which you take your sample.
As an additional example, the referenced article "Preferred Stock Versus Common Stock Investing Results" provides a similar comparison of price data (preferred vs. common) throughout 2014.
Regarding using corporate bonds for this comparison: The purpose of this article was to provide some data to those weighing the pros and cons of investing in common stocks versus preferred stocks since such data is extremely difficult to come by (which is what motivated me to become a preferred stock researcher and author on the subject many years ago). I don't know that a comparison of corp bonds to HQ preferreds would be as interesting since the two would track in almost identical fashion (i.e. the forces that act on one also act on the other).
Thanks for taking the time to post.
You are correct that the Yield-To-Call formula considers cap gain/loss, assuming that the issuing company redeems the shares on the published call date. But since common stocks have no call date, YTC could not be used for the comparisons that are the subject of this article.
The common stock yields that we see quoted on various websites (including SA) use the Current Yield formula. In order to be comparable to common stock dividend yields, I needed to use Current Yield for the preferred stock returns presented here as well.
Thanks for posting.
They usually do. Just be careful when applying the strategies of a value investor to an income security. Doing so will often lead to an undesirable result.
As mentioned in the article, income investors are in it for the consistent, regular income that preferred stocks generate as long as you own the shares. Accumulating more income-generating shares is the goal, so most income investors see a period of rising rates and falling prices as an opportunity to buy.
Conversely, value investors make the bulk of their gains by buying low and selling high. A period of falling prices is seen as a time to sell in order to limit losses. That's the exact opposite of how a value investor views a period of falling prices.
Thanks for posting.
When using PFF as a proxy to represent the movement of overall preferred stock market prices, you run into two problems that are hard to get around:
Problem #1: During the time frame that you are citing, PFF was composed primarily of preferred securities issued by banks, so comparing the price movement of PFF with the S&P500 common stock index during that period would not provide a meaningful result (the composition of the two were, and still are, entirely different).
Problem #2: PFF is an Exchange-Traded Fund (ETF). The objective of those managing the fund is to buy and sell positions within the fund such that the market price of the fund moves in concert with the value of an index. PFF is pegged to the "U.S. Preferred Stock Index" as published by Standard & Poor's, not to the S&P500 common stock index to which you are making your comparison. The movement of one is unrelated to the movement of the other.
While comparing two data sets over different periods of time can certainly lead to interesting and varying results, you need to be sure that your data sets are, in fact, comparable to begin with.
Thanks for taking the time to post.
As I mention in this article, the common is up about 16% over the last 12 months. If you think that value growth is sustainable, then you are absolutely correct - the common is the better play.
Thanks for posting.
Yes. The list you are referring to is one of several one-click "hotlists" that are available to those subscribing to my preferred stock newsletter and research service (called the "CDx3 Notification Service").
You can read more about it here:
Thanks for reading.
The tax break offered by Qualified Dividend Income securities is a great perk, but be careful to do the math. Most often, preferreds that are QDI-designated also offer a slightly lower coupon to begin with, so the tax break is often eliminated by the lower income you receive (good news, meet bad news).
See "Are Lower Tax Preferred Stock Dividends Really A Better Deal?" for comparison charts and data here:
Thanks for posting.
As the table under the first chart illustrates, falling prices will continue to deliver an increasing number of candidates into your wheelhouse.
Thanks for posting.
You might be waiting (and giving up the income while you do so) for quite a while. Even during the crisis years, the average price for high quality preferreds dipped to about $18. At the lowest point, trust preferreds (TRUPS) issued by BofA, Citi and a few other big banks fall all the way to about $10 for a few weeks, then recovered once TARP kicked in.
While knowing what the future holds for these securities is well beyond the edge of my clairvoyance, waiting for prices to fall below $12.50 could be quite a wait...but who knows...
Thanks for reading and posting.
Glad to hear that you have found my preferred stock research helpful. Remember that applying value investing strategies to an income investment can frequently lead to an undesired result. Persistent inflation would, presumably, be accompanied by persistently increasing interest rates, which, in turn, would put downward pressure on the market prices of fixed-return securities (bonds, preferreds). If you are using such securities hoping to realize a downstream capital gain (ala value investing), you have to pay closer attention to price movement. But for long-term income investors, price changes are less relevant since income investors generally have no intention of ever selling, regardless of price movements (chump avoidance).
Thanks again.
How one investor defines "safe" can vary entirely from that of another investor, so it's a hard question to answer. Use the information provided by SA on this company (search for common symbol AGO), SEC filings and press reports to determine if the risk here is consistent with your personal risk tolerance, goals and resources. Thanks for reading and posting.
Using the preferred stock search engine on my subscriber's web site, I added cumulative dividends to your criteria (call-protected for at least 2 years, 6.5%+ current yield) and limited the list to securities trading below their par values. I get 49 candidates as a result, most of which are unrated (but I know you perform your own due diligence regardless).
I see several mortgage REITs, upstream oil produces and Greek shipping companies in this group. Going slightly above par opens the field considerably. As to how many are trash, one man's trash may be another man's opportunity...:-).
By the way, you can see an example screen shot of my search engine here (20 parameters):
Good to hear from you Bruce.
Why would you wait to sell until prices are lower? When prices fall, income investors buy higher yielding shares for bargain prices. Be very careful when trying to apply value investing principals/strategies to an income investment.
Thanks for posting.
I've never been a fan of preferred stock ETFs for several reasons. For example, if you subscribe to the notion that an investor's objectives for their investment, and a fund manager's objectives for managing the fund, should be consistent, then you would never invest in a preferred stock ETF.
Commonly, the objective of a preferred stock investor is reliable, stable income. The objective of a preferred stock ETF manager, on the other hand, is to buy and sell positions within the fund such that the market price of the fund mimics the movement of an index. Those are two completely unrelated and entirely inconsistent objectives.
There are several other reasons described in an article titled "Preferred Stock ETFs: The Downside That Preferred Stock Investors Can Avoid" from a while back that are just as true today as they were then.
Thanks for posting.
It sounds like you are using a strategy that relies on selling shares as they get cheaper, rather than buying. Applying value investing principals/strategies to an income investment can often produce an undesired and/or unexpected result. In any case, thanks very much for taking the time to read and post.
Good to hear from you again MB. Thanks for posting.
Good point. Thanks for reading.
Glad you enjoyed the article. Thanks for commenting.
From the paragraph describing CTY under the second chart: "...CTY, presented here in green font, is an Exchange Traded Debt Security (ETD). ETDs are very similar to preferred stocks and are often labeled as such, but they are actually bonds that trade on the stock exchange..."
Thanks for posting.
Hello Bruce. With today's high prices, it surprises me that volumes for preferreds are so high every day. I believe this to be caused by value investors who are trying to treat an income investment (preferreds) as if it were a value investment (common stocks), looking for a quick cap gain.
And thanks for the article idea!
You are correct that 5% YTC is 5% YTC, regardless of purchase price. And purchasing above par exposes you to a cap loss in the event of a downstream call, whereas purchasing below par positions you for a cap gain in that event.
Just remember that the lower the coupon, the less likely the issue will be called. Redemptions for preferreds with coupons below 6% are relatively rare while redemptions for preferreds with coupons of at least 6.5% have about a 92% probability of ultimately being called.
See "Is Your Preferred Stock About To Be Called?" here:
A final clarification: Be careful with YTC calculations. The formula assumes that the issuer redeems the shares on the published call date (unlike many bonds, there is only one call date for a preferred stock so YTC is the same as Yield to Earliest Call), but preferred stocks are rarely called on their published call date.
A preferred with a coupon of 5% is unlikely to ever be redeemed so YTC calculations are not meaningful for such an issue.
Thanks for posting.