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Valyooo (34.27)

Preferred stock



March 31, 2012 – Comments (4) | RELATED TICKERS: PGF

I understand what preferred stock is, how it works, the rules, etc.

When is the right time to buy preferred stock though?  If I want income I would go for the bonds, and if the company is going to experience a surge in profits, I want the common stock.

So when does it really make sense to buy the preferred?  I guess just if it looks cheap?  Maybe after a recession?  If the preferred par is 100 and yield is 7% and it cuts the dividend and it plumments to like 50, I could see why it is the better buy in a low interest rate environment on the way out of recession.  But the common stock would proabbly do better.


Any insight onto buying preferreds, when it makes sense, how to value it, etc?

4 Comments – Post Your Own

#1) On March 31, 2012 at 7:21 PM, JakilaTheHun (99.92) wrote:

Preferred stock is really more like debt in most cases.  Since it's lower on the totem pole, it typically pays higher yields than bonds.  So you want to buy it if you're an income investor that's willing to take on a bit more risk in order to get a higher yield.

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#2) On April 01, 2012 at 9:21 AM, GrowthnValue (< 20) wrote:

I've seen someone talk about preferreds before - I think Rayvt.  If it is the person I am thinking of, he recommends some service that cuts the list from thousands to a couple hundred.  I don't own any preferreds myself, but the big rule of preferreds that I remember is - don't buy above par.  I believe that most preferreds are callable, so if you buy above par (usually $25), it can get called at $25 and you are out the premium.  Also, I believe that the experts on this think it is pretty easy to make a portfolio that is better than one of the preferred ETFs.

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#3) On April 01, 2012 at 11:23 AM, Valyooo (34.27) wrote:

Well yeah experts can always create better portfolios than ETFs

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#4) On April 01, 2012 at 3:36 PM, constructive (99.96) wrote:

One thing to keep in mind is that if you're targeting say 10% returns, traditional preferred stocks selling at or above par are not really going to help you get there.  The intrinsic return isn't high enough and they are too correlated to common stocks to be very useful as a hedge.

If you have a higher return goal you could instead look at distressed preferred trading below par like ATPGP.PK (45% below par) or LUTHP.PK (19% below par).  Of course, this is much higher risk.

If you're interested in preferred stock, I suggest you make a spreadsheet of convertible preferreds including current yield, yield to call, yield to maturity and conversion price / market price. Fairly easy using this website. 

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