Russ,
You’re fun to play with, because you ask shrewd questions.
Yes, using the standard formula for calculating YTM/YTC/YTW is a flawed process, because I’m not reinvesting divs at the coupon rate, as the formula assumes. And the situation is even worse, because I’m not discounting estimated gains by taxes and inflation (though I do have a spreadsheet that does this and use it when vetting hundreds of bonds).
My thinking is this. Some issuers, such as WFC, have a common stock that pays a div, preferred stocks that pay divs, as well as issue bonds. What’s needed is a means to select among those securities so as to buy what seems to be the best return for the least risk. This is where Quill and I go 'round and 'round. He runs a very complicated divvie program that he asserts is the best way to build wealth through compounding. I claim he’s trading elephants for rabbits and don’t want any part of it.
So, what’s going on? Bonds mature. Stocks don’t, as don’t bond funds (be they open-end, closed-end, or exchange-traded). In that respect, preferreds are bond-like enough that they can be treated as bonds, even they are junior in the credit line. (There are some exception to the bond/stock maturity thingie, such as perpetual bonds and perpetual preferreds. Futher complicating the matter is that the divs offered by some preferreds are non-cumulative.)
So, let’s work some examples. MS/PRE has a 4% coupon and offers an attractive 5.32% current-yield. But if bought at its present price of $26.84 and called at its call date of 10/15/23, a negative (-0.72%) return would result. Whoops. A person would have been better sticking with cash. Same-same with PFFA or any divvie-paying common stock. There is no price support. Two years ago, it was trading at $26-$27. Now it’s around $23-$24, or $2 bucks down (roughly -13%). Yahoo Finance estimates the present current yield for PFFA is a fat 7.17%. That means the net-gain --if PFFA were bought 2 years ago-- is an underwhelming 50 bps/year, or only one-third of what my checking account at Rivermark CU is paying me. (1.5% on the first $15k.) Clearly, a small-money, small-experience investor --who is my chief concern-- would have been better off sticking with cash, especially since he/she needs an emergency fund more than they need money at risk in the financial casinos chasing yields that don’t materialize.
So, what might be a good compromise? If one has some discretionary capital, but is hugely risk-adverse and suspects this present economy and market are beyond salvaging by the idiots running the Fed/Treasury cartel and are likely to crash hard after the leftists have lost the midterms, then making some $25 bets on deeply discounted pfds whose divs are cumulative and whose issuer’s fundamentals are decent might be a good way to “dip a toe”. The worst-case losses are tolerable. The best-cases aren’t insignificant on either an absolute or risk-adjusted basis. But what’s a middle-case case? The person has begun the process of learning how to chart, how to make sense of financial statements, how to write orders and deal with bid/ask spreads, how to get money into and out of brokerage accounts, how to deal with taxes on gains received, etc. None of these back-office skills are taught in the schools, nor are they well covered in the introductory books on investing.
There’s a line in a poem by Antonio Machio that I love. “Caminate, no hay camino. Se hace camino al andar.” [Roughly, “There are no roads but by walking.”] If one is to move from being a small-money investor to being a larger-money investor, he/she needs to learn to take risks, but not so much/many that they get thrown out of the game --either financially or emotionally-- before they’ve had a chance to learn the game. Hence, the title of my “tip sheet”, The Timid Trader. I HATE risk. But what got me into bonds was the huge discrepancy that occurred in the dot.com era between the fairy tale promises of stocks and the solid fundamentals of bonds where real assets backed up coupons to be paid, and some fat cap-gains were possible. (E.g., buy XRX’s 8’s of '27 at 34 in '03 or so and ask what your return is when called at par in ‘17.) In those days --and still-- the “average” investor runs away from "junk bonds’ but blithely buys junk stocks on the basis of their “narrative”, but never their chart or fundamentals. When the company fails to deliver and the stock crashes, then they whine, “On advice of TMF , I bought such such and such. Now I’m losing money. What should I do?” Quill’s answer is simple. “You failed to get in a timely manner, and you failed to get out in a timely manner.” To which I’d add, “To your loss on that stock, you need to add whatever fee you paid TMF for their bad advice.” (In fact, I’ve built a spreadsheet that shows a small money investor will always go broke following the G Boyz advice, because they’re trying to play a game with a negative expectancy relative to their account size.)
Russ, think about your friends and family. If they are typical, they have zero interest in investing, much less learning to do it well, and I don’t blame them a bit. Not only are they discouraged by Wall Street and financial “advisers” from learning the game --because that would means a loss of revenue to those predators-- them “in control” don’t want uppity citizens who will call bullsh*t on their scams. So, yeah, there’s a political agenda in my tip sheet as well. But for now, I’d rather avoid “politics” and just focus on getting a beginning investor started on the journey with a $200 account. In short, I’m a “belt-and-suspenders” investor, and that caution has served me well. If some smart market commentators are to be believed --e.g., Doug Casey, Paul Roberts, Jim Rogers-- the years ahead are a financial war zone that the lazy/unprepared/inexperienced won’t survive. Smart, savvy investing doesn’t take big money. It takes the discipline that comes from doing trades, one at time, on whatever schedule one’s other life can accommodate. (Hence, the reason I like Ed Sekota and Stan Weinstein and Ben Graham and Justin Mamis.)