When the pandemic first hit in late March 2020 several members of the board mentioned WFC-PL as an enticing investment. The price of these is now below that level and the yields (if they pay) are over 6%. I admittedly have not further researched these yet but wanted to make mention of them to see if anyone has studied them further.
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Though it has been a reasonable pick since then for yield–something shorter term than equities but longer term than cash–
the problem is that inflation has returned. Neither the principal (market price) nor coupon is inflation adjusted, so you slowly lose wealth.
More than slowly now.
At the current price, it’s yielding 6.55%. Inflation is in that vicinity, so the real total return is about zero.
As an example, the price of WFC/PL is essentially right where it was three years ago.
In real terms, the capital value is worth about 12.5% less than it was then, losing 4.3%/year in this stretch–about $140-145 less.
And each coupon is also worth 16% less than it was, but that is a smaller problem.
It has paid a 6.5% yield, so the real total return is still positive.
Just not very positive.
It loses value more slowly than T-bills–breaking even is doing quite well in fixed income these days.
But I don’t think one could call it a good pick these days if you expect inflation to last a while.
If I really wanted an inflation adjusted yield, I’d find all the stocks paying dividends over
2%/year and buy equal dollar amounts of the 15-20-25-30 of those with the highest ROE.
High ROE dividend payers tend not to go bust, and the dividend requirement isn’t so high you’re reaching for yield.
Since Jan 2000 that approach would have returned around 14%/year, and inflation has not been anywhere near that much. Beats breaking even.
If that is just too much complication, I hate to say it, but a dividend fund might not be so bad. Better than WFC/PL, even if the fund price turns out to be lower for the next few years.
Jim
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I have traded this security successfully every time. I have a buy order. While some may view the yield is not providing any inflation adjusted return, one has to step back and ask, will inflation rate come down? Is 300 basis point higher yield than UST is adequate return adjusted for risk? Having said that, I will wait for one or two more Fed hike before I buy any fixed income securities.
Investing is about forecasting the future. When it is darkest, the dawn is near.
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I dipped my toes with a small position. This is has fallen less compared to TLT otherwise the spread between 30 year yield and the security has tightened. Nevertheless thought I will open a small position to track. There are some securities like VS yielding 7%+ dividend. For those seeking income, there are choices out there.
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Add some more today.
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The yield is still 2% higher than 10 year treasuries. While the Fed raised rates lot more than I expected, the inflation is coming down. May be it will be around 3% or higher but, if the recession lands, there is a great chance the Fed will cut rates. If not, just earn some money and not lose in real terms.
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Added more to my existing position. Hoping rates are not going to go much higher from here.
PS: I fully recognizing the low interest rates from 2010 till now (ZIRP regime) are outlier and current rates may be more close to normal. 
Are you buying WFC/PL ? Can you trade it like a normal security ?
Yes. It is listed. WFC.PR.L is symbol in E*Trade. This is something I have bought and sold from 2008 multiple times.
| WFC.PR.L | BAC.PR.L | |
|---|---|---|
| # of Shares | 6.3814 | 20 |
| Conversion Price | 156.71 | 50 |
| 130% of Conversion Price | 203.723 | 65 |
| 75 | 72.5 |
Given where the current share price it will take a very long time to convert. So essentially you are locking in the rate. If you can buy it in IRA account, I would recommend that, since you don’t have to pay tax on the dividend. It is also eligible for 15% tax rate.
QuantumOnline Search for wfc-l for additional details
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It’s great having two such similar securities from different companies. If you are unfortunate to have a loss in one, you can realize it for tax benefits and switch the cash to the other.
I did that in 2020 and again this year.
Another preferred to consider is FHN-D. This is a short term pick. It is almost certain to be called on May 1, 2024. Otherwise the fixed rate will reset to a SOFR rate plus which at current rates will be over 9.5%. SOFR is the replacement for LIBOR
It is currently trading at $22.95. You will get paid a total of $1.525 in dividends on Nov1 and May 1. Plus the gain of $2.05 when redeemed on May 1, 2024. Works out to about 30% annualized return.
FHN got hit by the regional bank crisis and then again when TD called off acquisition due to delay in obtaining regulatory approval. While not 2B2F like BAC or WFC, it is considered a solid well run bank based in the SE region.
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So you buy and hold till May 2024 ? What happens on May 1st ?
Either it gets called or the rate resets. Don’t assume it will get called. The bank may not be able to recycle this preferred and not sure whether they have capital surplus to call this. I suppose you have already checked that out.
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While the yield is 2% over 10 year, 10 year itself is having 2.5% real yield, i.e, above the inflation. So you are getting closer to 4.5% above inflation rate. Time to park some profits there.
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WFC/PL current level 1040 did the bounce a few times in 2022 and 2023 - If it drops below this level, may go down to the low in 2020
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From the time of this post the stock is up 12.33% and including dividends 14%. Either you can be mesmerized by “inflation talk” or understand the inflation is nowhere near 14% return you enjoyed.
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You may be right, in hindsight. Glad you made some inflation-adjusted gains. I believe you are referring to Jim’s quote, I don’t think one could call it a good pick these days if you expect inflation to last a while, and his statement seems like a reasonable point to make. He didn’t say inflation was definitely going to last a while.
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Your post is a copout. I put my money and not empty words. BTW, I have posted over the years on my sell also. I have at least made 3 round trips with this and each instance making 20% excluding dividends.
<< I don’t think one could call it a good pick these days if you expect inflation to last a while, and his statement seems like a reasonable point to make>> What is reasonable about it? Investing is not rear-view mirror driving, it is forward looking. When it is clear the peak inflation is behind and bulk of FED’s interest rate hike is behind us…
Fearmongering works, there are suckers for that. Those fearmongers sound very sage in the short-term and they are very terrible in the long-term.
All these inflation adjusted return, arguments serve only one purpose which is to scare people. For ex:
Except, 3 years ago 30 year rates interest rates was < 2%. We have heard about picking the starting point, this is the prime example of that abuse. I didn’t suggest someone buy at that point, I suggested when the
peak inflation is behind us and the interest rate hike is almost done.
If you don’t understand the environment in which you are investing, then yeah you can follow such pundits.
Thanks, I certainly try to take care about the pundits I choose to follow. Glad you’ve made three good round trips.
Here is the inflation graph. Now, the problem of rear-view mirror driving is you are not looking at falling inflation rather you are so myopically focused on the past high inflation. Even there, there is no honesty and data picking, if one were to look at past, then just looking at from 2012 to 2020, the inflation hardly surpassed 2%. So it is reasonable and easy to determine the inflation will get back to trend. Separately that gent is big on mean reversion. So why a seemingly smart person make such mistake? I wish I knew the answer
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