The Ten Criteria That Saved Preferred Stock Investors

Prior to the start of the Global Credit Crisis in June 2007, would you have known which publicly traded financial institutions were going to go bankrupt, wiping out their preferred stock investors, versus which institutions were going to be acquired by healthier banks, saving their preferred stock investors?

Throughout 2008 daily press coverage identified publicly traded banks that were in deep trouble - New Century, Lehman Brothers, IndyMac, National City, Fannie Mae, Freddie Mac, Merrill Lynch, Countrywide, Washington Mutual, Bear Stearns, Wachovia.

Some went bankrupt, wiping out the preferred stock dividends and principle of those preferred stock investors who had invested in them; others were acquired by stronger banks, saving those investors. The preferred stocks issued by banks that were acquired prior to bankruptcy continue to pay their dividends to this day.

Here are the big publicly traded institutions that failed, wiping out their preferred stock investors: New Century, Lehman Brothers, Fannie Mae, Freddie Mac, Washington Mutual and Bear Stearns (IndyMac also busted but did not have any preferred stock issues trading).

And here are the publicly traded banks that were acquired by a healthier institution: National City (by PNC Financial), Merrill Lynch (by Bank of America), Countrywide (also by Bank of America) and Wachovia (by Wells Fargo). Those invested in the preferred stocks of these banks were saved and have received all dividends uninterrupted.

But here is the really interesting thing about these banks with respect to their preferred stocks and those who invested in them. Based on my preferred stock research, chapter 7 of my book, Preferred Stock Investing, itemizes ten specific criteria that preferred stocks must meet in order to be considered the highest quality preferred stocks available - “CDx3 Preferred Stocks.” These ten “CDx3 Selection Criteria” were first published in the first edition of Preferred Stock Investing in October 2006 and are now listed in chapter 7 of the current third edition, published in May 2009.

This table illustrates how the ten CDx3 Selection Criteria performed during the two-year long Global Credit Crisis. Notice that the preferred stocks from the banks that went bankrupt were unable to meet the ten CDx3 Selection Criteria (CDx3? = NO) to begin with.

And further notice that the preferred stocks that were able to meet the ten CDx3 Selection Criteria (CDx3? = YES) were the exact ones issued by the banks that were acquired and continue to pay dividends to this day.

Throughout the two-year long Global Credit Crisis, the ten CDx3 Selection Criteria, first identified in October 2006, successfully identified which preferred stocks to stay away from and those that would be safe, 100% of the time and in advance, protecting preferred stock investors. All dividends from the preferred stocks issued by these banks have been paid in full and on time. A 100% successful track record under the most extreme of conditions.

You can read about these ten specific criteria in chapter 7 of Preferred Stock Investing (see retailers).

Many Happy Returns.