Financial Reform Bill - What's In It For Preferred Stock Investors

Take a look at this list of 19 Trust Preferred Stocks (TRUPS). Note the Effective Annual Return (EAR) column (far right). As I will explain in a moment, the nice numbers that you see there are delivered to us by the Collins Amendment to the Financial Reform Bill, just signed into law on Wednesday.

All 19 of these TRUPS also meet the CDx3 Selection Criteria from chapter 7 of my book, Preferred Stock Investing, Third Edition (see retailers). These are the highest rated, highest quality trust preferred stocks available.


As I am about to explain, we rarely have an investment opportunity like the one that the Collins Amendment has just delivered to preferred stock investors.

What We Know

We each have to make investment decisions that are consistent with our own goals, resources and risk tolerance. But I do not know that we have ever had a case where we know so much about a specific investment opportunity.

Thanks to Senator Susan Collins, we know the specific preferred stocks involved; we know their exact call date; we know their current market price and we know the price that we will sell them back to the issuing bank for on that date in the event of a call.

And in that event, we know what our capital gain income is going to be and the day that we will receive it. And we know what our dividend income is going to be in the meantime and the date each quarter that we will receive that income.

And, as calculated for you on the above table, we know what our annual dividend yield will be as well as our Effective Annual Return. We know all of this, and, unlike most other investments, we know it in advance.

Background Summary

If you haven't already, please read this July CDx3 Newsletter article so that you have the full picture. To summarize, the Collins Amendment to the Financial Reform Bill makes what would otherwise be seen as a minor accounting change for how banks tally up and report their reserves to regulators (called "Tier 1 Capital"). But, for preferred stock investors, minor it is not.

Until the Collins Amendment came along, banks were able to count TRUPS, along with traditional preferred stock and common stock, in their Tier 1 Capital calculation. Being able to include TRUPS in their Tier 1 Capital calculation is one of the primary reasons that banks issue TRUPS rather than regular, traditional preferred stocks.

But with the signing of the Financial Reform Bill two days ago, banks will no longer be able to count TRUPS toward their Tier 1 Capital once the new law kicks in a couple of years from now.

Because banks will no longer be able to count TRUPS toward their Tier 1 Capital calculation, they will almost certainly "call" their TRUPS once their respective call dates arrive, and replace them with new traditional preferred stock issues.

When a TRUPS is "called" the issuing bank buys your shares back from you for $25.00 per share - no more, no less and regardless of your original purchase price or the then-current market price. That means that you will earn a nice capital gain on any TRUPS shares that you can buy now for less than $25 per share, on top of the great annual dividend income that you'll be earning in the meantime.

7.3% Today

The average annual dividend yield of the top 19 TRUPS listed on the above table is 7.3% today. Adding a capital gain onto that dividend income gets you the Effective Annual Return that you see in the above table in the event of a call.

While we cannot say with certainty that these TRUPS will be called (that remains up to the bank), it is not clear why the issuing bank would not seek to do so since the Collins Amendment removes the primary benefit of TRUPS to the bank (boosting Tier 1 Capital) compared to issuing a traditional preferred stock.

The call dates of the first ten have already arrived while the call dates of the other nine will arrive over the next couple of years. So all 19 of these high quality preferred stocks will be callable when the TRUPS disallowance kicks in. And notice that all are currently selling for a market price less than $25.00 per share.

While the "window of opportunity" here lasts a couple of years, obviously those getting in earliest tend to see the highest rewards. Since this exclusive research was first presented in the July issue of the CDx3 Newsletter four weeks ago, the market prices of these TRUPS have risen over 5%.

Never before have we known so much so far in advance about a preferred stock investing opportunity. Subscribers to the CDx3 Notification Service are provided with the CDx3 Preferred Stock Catalog on the exclusive subscriber's website which includes the trading symbols of these top 19 TRUPS. To take advantage of this rare and unique opportunity, you should consider subscribing to the CDx3 Notification Service today.

Already a subscriber? The trading symbols for these 19 TRUPS are posted on the CDx3 Discussion Group (subscriber's website) under the title "July 23 Letter TRUPS Symbols."

Many Happy Returns.