Variable rate preferred stocks sound like a good idea, especially during a period of low rates. The idea is that preferred stock investors will be able to ride the wave up when rates start to rise in the future.
In addition to increasing income, this mechanism also offers a degree of principal protection since such securities would theoretically maintain their value as rates go higher.
It is for these reasons that the top four movers each traded more than 250,000 shares last Friday [1] - GS-A and GS-D from Goldman Sachs (GS), USB-H from U.S. Bancorp (USB) and MS-A from Morgan Stanley (MS). And almost two-thirds of the variable rate preferreds now trading on U.S. stock exchanges traded more than 10,000 shares that day.
But the higher dividend payout that many are looking forward to from today's variable rate preferred stocks is unlikely to ever materialize.
Current Crop
There are currently 34 variable rate preferred stocks trading on U.S. stock exchanges [2]. These 34 securities were issued between May 1994 (HBA-D from HSBC (HBC)) and March 2007 (BML-L issued originally by Merrill Lynch now by Bank of America (BAC)).
Most of these 34 issues are from banks and insurance companies (domestic and foreign), although Southern California Edison's (EIX) SCEDN, issued in April 2005, is still trading.
18 of the 34 enjoy investment grade ratings from Moody's while 18 are rated as investment grade by S&P.
Determining the Dividend Rate
While it would be great for investors if variable rate preferred stocks used a standard method for determining the dividend payout, that is unfortunately not the case.
Variable rate preferreds generally offer a dividend rate that is pegged to an index such as the 1-month or 3-month LIBOR rate (currently at 0.30%) or a specific U.S. Treasury Bill rate. They also frequently (but not always) offer a
