Tuesday, May 19, 2009

Preferred Stock Investing Reader Question (sign in to post your question)

Since new preferred stock issues have been slow this year, is there anything to buy? Beth C.

From the May 2009 issue of the CDx3 Preferred Stock Newsletter (free; what's this?).


My research focuses on just the highest quality preferred stocks ("CDx3 Preferred Stocks") and documents the methods for adding them to your portfolio under different economic conditions - during a "buyer's market" (now) or during a "seller's market."
During a seller's market for CDx3 Preferred Stocks (which is the vast majority of the time, historically) CDx3 Investors purchase CDx3 Preferred Stocks when they are first introduced to the market as explained within chapter 11 of Preferred Stock Investing. Even with the ten CDx3 Selection Criteria eliminating about 90% of new preferred stocks leaving just the highest quality issues, new CDx3 Preferred Stocks are still historically introduced at a rate of about one to two per month so there is always plenty to pick from.

During a buyer's market, as dividend rates rise making new issues more costly to issuing companies, there will be fewer new issues so CDx3 Investors use the "CDx3 Bargain Table" to identify purchase candidates (Preferred Stock Investing, chapter 10).
The CDx3 Bargain Table is created each month and identifies CDx3 Preferred Stocks that are at a point in time that, my research shows, tends to favor buyers. Specifically, these are CDx3 Preferred Stocks that are (1) more than two dividend quarters old, (2) have yet to reach their call date, (3) are just starting a new dividend quarter and (4) are available for less than $25 per share.

The above example is the CDx3 Bargain Table from April 2009. You can see that CDx3 Preferred Stocks are all rated "investment grade" (Baa3 or higher). Knowing when market prices will tend to favor buyers is the real trick and, as you can see in this example, a lower market price means that your yield (the annual return that you make on the money that you actually have invested) goes up. The average annual yield (see the column labeled Highest Dividend Yields) for this group of CDx3 Preferred Stocks from April's CDx3 Bargain Table was a very respectable 13.735%. It pays to know when to consider buying.

Preferred Stock Investing explains exactly how to produce this table on your own. Otherwise, the CDx3 Bargain Table is provided to subscribers to the CDx3 Notification Service each month. CDx3 Preferred Stocks from banks (blue diamond) and non-banks (grey triangle) are also identified for subscribers along with their current Moody's rating and other information for each issue so that you can see where the real bargains are (the trading symbols have been removed from the image here to protect subscription values).
Even during a Global Credit Crisis.
Many Happy Returns.