WFC-PL - Bank Preferreds

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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