Preferred Stock question

Hi everyone,

My parents almost exclusively utilized preferred stocks in retirement. However, today I do not hear anyone talking about them. In fact, my broker doesn’t seem to highlight them either. They have a screener for them but it is absolutely buried in terms of trying to find it.

Why aren’t these more widely used, or are they and just not discussed? I understand they generally provide a fixed rate dividend during their life which can be set or perpetual. I understand that the pricing is dependent on the interest rate changes but that risk is reduced if holding until called by the company. It would seem the largest risk to me is default of the company which should be reduced by investing in larger healthy companies.

What am I missing? Is there some reason these are not more of a prominent retirement tool today? There are several paying 5-6% that are available today with good track records of payment. I inherited one from my parents that leads me to this question.

Don

I inherited a bunch of preferred stocks in 2015. But with suppressed rates they all got called on their due date and new preferred stocks had less yield. I recall rayvt got a good price on one in the 2018 mini taper, and I am starting to loose at them now that rates are headed back up.

I will let smarter investors elaborate.

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Autocorrect turned look into loose.

Signed,

Fat Thumbed senior

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My parents almost exclusively utilized preferred stocks in retirement. However, today I do not hear anyone talking about them.

That’s because preferred stocks turned crappy a couple-three years ago. Low interest rates meant that the good ones got called. 75% of the ones I had have been called, only a few tag-ends remain.
The companies have been calling the good, high-yield preferreds and issuing new ones at a low rate that is too low to be worthwhile. And the buyers of those will be STUCK with them, because the companies will not call the low-rate ones, they’ll keep them just like I will keep my 2.5% mortgage.

The best source of info used to be CDx3.com, but he closed shop last year—because nobody kept subscribing because there was nothing good coming out.

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Twenty years ago there were hundreds of trust preferred stocks traded on the NYSE. They were offered by major investment houses and paid dividends based on interest from a single bond issued by a company. Effectively these were bonds traded on the stock exchange.

As interest rates fell most got called. One that i sold recently is ticker DDT. Its the trust preferred for the Dillards departnent store.

Once many utilities had long lists of preferred stocks. Most have been called. That probably implies more economical financing elsewhere.

Thanks for the replies folks. This is what I suspected and actually hoped. The higher paying preferred were called since the companies could borrow money cheaper elsewhere.

I wanted to make sure that there wasn’t some other change that made these a poor investments vehicle. My logic is that is that I have approached my retirement with the bucket theory. I have my growth stocks, 3 years of expenses in cash and then instead of bonds had additional cash. I need less than 3% to cover my expenses so I am thinking that moving half the third bucket over to preferreds paying 5.5 - 6% is a good thing and I am not too worried that there may be higher paying ones available in the future.

I may be losing to inflation for the short term, but sitting in cash it was losing more.

Appreciate your time on my question.

Don

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A couple of years ago, I discovered a preferred dividend play, Tsakos Preferred (TNP-PE), selling at a discount. I used it as my test case for Preferred shares investing. Share were trading at a discount
to par, so I nibbled on a small stake. So far, so good.

A couple of weeks into the Russia-Ukraine conflict, I mentioned on another board the country risk posed by a Greek-owned entity, Dynagas Partners preferred (DLNG Pre:A or DLNG Pre:B). The company owns 6 LNG tankers, and 5 of the 6 vessels are leased by Russian entities. Like TNP-PE above, preferred shares dropped like a rock. But, only for about a month. Shares have since recovered. Didn’t bite on that one, but do know one Fool reader who took advantage of the discount.

Wouldn’t count on it being a successful strategy each time. But, it seems to me, when a preferred stock trades at a discount to par, there are two ways to benefit

  1. The dividend continues to get paid
  2. The “anomaly” that creates the discount goes away, and the share price recovers.

YMMV,
HohumYNWA

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I allocate 10-15% of my portfolio to preferreds. I use to buy individuals shortly after their issue and never above $25.50. Sometimes holding till their call date. QuantumOnline and CDx3 are good online resources. CDx3 is still active, but with a different owner.

Now, I simply buy ETF’s that hold preferreds. PFFA is paying 8.51%, but there are numerous other ETF’s for preferreds. Almost all Preferred’s and Preferred ETF’s took a hit with Covid and the Russia war. PFFA generally use to stay in the 25ish range but is now around 22-23 and headed north.

Russ

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