These introductory paragraphs are meant to be read by new members of my audience, and are necessary to understand the process by which I arrive at my decision whether or not to invest in the preferreds of a particular company.
I became, primarily, a preferred investor when I discovered I was not as smart as I thought I was. This came as a rude awakening at the beginning of 2009, when I still believed I was smart enough to dig down into the numbers and really understand a company's financial statements - well enough, at least, to figure out how well they were actually performing.
Sadly, I couldn't. Around that time, after spending hours listening to a number of conference calls, it dawned on me that they were often spun to make bad seem good and down look up. Around then I also discovered Seeking Alpha and began reading its articles to help me make sense of all the information I was trying to absorb. However, no matter how intelligently each article seemed to be written and constructed, I found, more often than not, the comments of other SA participants often contradicted or vehemently opposed the contributor's point of view.
My problem was that I didn't have a clue as to which side I should be on. I realized I simply didn't have sufficient information to decide. And that's when I knew that I should either exit the market or discover a way for an investor, such as I, with limited knowledge to ultimately succeed and prosper.
That's when I discovered preferreds, and after intensive study, realized that all I had to do was determine whether or not a company I intended to invest in was relatively safe from any imminent existential threat. Notice I qualified that as an imminent threat. I state this because I don't have a crystal ball, nor to my knowledge does anybody else; consequently, nobody can predict the future, and "spit happens."
Given the right set of circumstances, any company could suffer an existential threat, especially those I intended to invest in, because they offered higher dividend yields and were certainly more risky than most.
Past is prologue; that's the basis of my research. It may not be perfect, but I believe this is data I could rely on. I can't tell the future, or even rely on financial reports, but I can, with a great deal of reliability, monitor how well a company performed over the past few years, or really as many years as I am prepared to research. Company officers lie at worst, or spin at best, during conference calls. Financial reports, likewise, can be spun utilizing legal accounting tricks.
But investors wage their hard-earned capital on what they truly believe is in their perceived economic interest, which might be correct and might not be. Regardless, the record of price movement of a company's stock cannot be spun or tweaked; it's a matter of record. This I have come to rely on.
Additionally, I like to do a brief review of each company's balance sheet as displayed on Yahoo Finance. There I can get a snapshot of their assets, liabilities, and debt structure. Finviz's financial highlights also helps me fill out the picture of the company sufficiently enough for me to decide to invest or not.
Considering an investment in a company's preferred shares should not necessarily be considered exactly as one would consider an investment in that company's common shares. There are a number of reasons for this disparity of thought:
- Preferred shareholders are primarily interested in a stable source of income rather than price appreciation, which is most often the primary goal of the common shareholder. Consequently, the common shareholder is, and must be, more attuned to near-term corporate events. Although similarly relevant to the preferred shareholder, unless they are harbingers of potential existential threats, they should be of no major concern. Likewise, the knowledgeable preferred shareholder should view periodic price fluctuation with little concern or interest beyond the possibility of making opportunistic acquisitions of additional shares.
- Most importantly, the only way a cumulative preferred shareholder can ultimately lose on his investment is if the issuing company goes bankrupt or if the holder is forced, or decides, to sell his shares at a loss. Although it might take years, should the company survive, all missed payments will have to be repaid at some future date, and the price will most assuredly not only return to its call value but surpass it by approximately the total amounts of missed dividend payments due.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.