PREFERRED STOCK INVESTING

Yields on savings accounts and CDs less than 5 yrs to maturity do not cover inflation. You can find better yields among common stocks, though at best, at higher risk. Even better yields can be found among corporate preferred stocks at greater safety, though not as great as for savings accounts and CDs (http://www.money-zine.com/Investing/Stocks/Buying-Preferred-Stock/). Getting at least 6% dividends is easy among preferred stocks. Preferred stocks are usually issued in perpetuity but with a call provision after 5 yrs. Preferred stocks are thinly traded and some study should be done before buying them. Many issues are beyond their call date today so may be called at any time. The commonest price - par - for preferred stocks is $25/sh and, if called, you must be paid the $25/sh. During the crash of 2008-2009, some companies offered to buy your preferred stock at less than par, but you didn't need to accept that.

There are two main types of preferred stocks, those whose dividends are cumulative (where I am involved), and those for whom they are not (that I do not touch). An attractive feature of preferred stocks, however, is that so long as a dividend is paid on the common stock, the preferred stock dividend MUST be paid first. For cumulative preferreds, if a dividend is skipped, it must be made up before the company can issue dividends on their common stock. There are also those, mainly banks, who may skip the dividend for as much as 5 yrs, but they must be paid before maturity. If the company should go bankrupt, preferred stocks rank higher than common stock in the proceedings (Actually, I think this is not a very significant feature.).

Preferred stocks are thinly traded so in buying them, it is best to do so with limit orders so you don't pay too much for them. Selling preferred stocks can be a bit tricky, but you can get some protection by selling with stop orders. Because of the thinly traded nature of preferred stocks, in selling you may have orders filled below your stop order if that is the only bid around and sometimes you get your order filled in pieces over several trades. With brokerages such as Schwab, several trades during one day are covered by one fee charge, but, if the trading goes on to another day, you will be charged for each day.

There are a couple of things about preferred stocks that even the pros fear and that is if the company that has issued the preferred is bought out by another company. In this process, your preferred stock may be called at par (usually $25/sh), but, if not, the preferred may not be traded; however, you will continue to get your dividend payments. This is called "Waldenized" after a famous case. Sometimes a "Waldenized" preferred will be offered redemption below par, but you don't have to accept it. The second fear is of inflation. Inflation tends to push down the price of preferreds with their fixed dividend as the bond coupons increase. Thus you may only sell your preferred stock at a capital loss, but if you are happy with the dividend rate, this may not matter and you would keep it. Today with such low interest rates on bonds, savings accounts, and CDs, the dividends on preferred stocks is attractive and many preferred stocks are selling above par. For example, all our preferred stocks are selling at or above par right now, but this could change in a hurry if inflation showed its ugly head.

Preferred stocks may be rated by the rating agencies. To the best of my knowledge, the only preferred stocks getting a AAA rating by more than one rating agency are certain preferred CEFs (Closed End Funds) issued by Gabelli that guarantee a 10% payout of NAV on the ETF shares. Thus they have a mandatory dividend on their common stock so MUST pay the preferred dividend. For example, we have some GAB (Gabelli Equity Trust) with a AAA rating by two agencies. It is past its call date and has had a partial call for some reason.

Many people trading in preferreds, feel that the safest preferred is PSA (Public Storage a REIT - Real Estate Investment Trust investing in self storage). PSA raises money by selling preferreds (the better part of an alphabet's worth) and has no debt. Thus they are not beholden to the whims of the financial industry though they must service lots of preferred issues. We are overweight in PSA-D, for example, the lowest yielding preferred of PSA. It is past its call date so may be called at any time, but, as the lowest yielding preferred stock of PSA, it is likely that others may be called ahead of it. Also it is currently selling a bit above par so the company would call it at a premium to par, and we would get a small capital loss if we bought it at the premium price. If they should call the preferred below the call price, we would get a capital gain.

Much discussion of REIT preferreds and some others is given on: http://boards.fool.com/real-estate-inv-trusts-reits-100061.aspx?mid=29689949. You may look up individual preferred stocks at http://www.quantumonline.com/QuickStart.cfm. You will have to register, but it is free. Look under Income Tables/All Preferred Stocks. If you don't want to deal with the complexity of buying individual preferreds, you could buy a Exchange Traded Fund(ETF). One that I have owned in the past but happen not to at present is iShares PFF. It is a low cost way to acquire a basket of preferreds assembled by some pros.