| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Preferred stocks shine in volatile market |
MarketWatch - June 3, 2010 - By Harry Domash
APTOS, Calif. (MarketWatch) -- With banks paying next to nothing on money market accounts, this a good time for income-oriented investors to consider preferred stocks.
Although bought and sold like common stocks, preferreds are more similar to bonds. They represent debt, not ownership. They're called preferred because a firm must pay its preferreds' dividends before paying common stock dividends. Thanks to recent market action, many investment-grade preferreds are paying dividends equating to 6% to 7.5% yields.
Like bonds, corporations issue preferreds to raise cash. At the IPO, the issuing firm sets the issue price, typically $25, and the annual dividend (usually paid quarterly), which generally remains fixed for the life of the preferred. The initial dividend yields (coupon rate) mostly range from 4% to 7%.
Because preferreds trade on the open market, the share prices vary with supply and demand. If the shares trade below the IPO price, the yield to new investors (market yield) moves above the original coupon rate, and vice versa.
Preferreds have minimum 30-year maturities and some are perpetual, meaning that the issuer is not obligated to redeem them. Most preferreds are "callable," meaning that the issuer has the right to call (redeem) them at the "call price" on or after a specified date (call date), typically five-years after issue. The call price is usually the original issue price, but is sometimes slightly higher.
The issuer is not obligated to redeem the shares at the call date. Companies are most likely to call preferreds if prevailing interest rates are below the coupon rate. If so, they would save money by calling the existing shares and selling new preferreds paying lower rates.
Investors, meanwhile, buy preferreds mostly for the steady income. They usually don't offer much appreciation potential. However, the recent market volatility has created opportunities.
Before the IPO, the issuer designates the preferred dividends as "cumulative" or "non cumulative." If cumulative, the issuer is obligated to pay the dividends. If it suspends the payouts, it still owes the money and must catch up by the maturity date, when it calls the shares, or before it pays dividends on its common stock. If non-cumulative, the issuer doesn't have to make up missed dividends.
Corporations that issue preferreds typically sell more than one series, for instance, Series A, Series B, and so on. Unlike regular stocks, there is no fixed ticker symbol format for each series. Different websites and brokers might use different symbols for the same preferred. When trading, it's best to use your broker's symbol lookup function. For instance, if you enter "Bank of America," most brokers will list all related securities, including BofA's preferreds.
Yield to call
Unlike market yield, which simply reflects the annual dividend and current trading price, the "yield to call" takes the call price and call date into account. For example, say that you pay $26 per share for 7% (coupon rate) preferreds originally issued at $25 that can be called in 12 months. The market yield is 6.7%, but you would lose $1 per share if the shares were called. If called in 12 months, your total return, or "yield to call," would drop to 2.9%. Conversely, if you bought the same shares at $24 one year before the call date, the yield to call would jump to 11.5% if called in 12 months.
Successful preferred investing requires understanding the issuer's ability to pay the prescribed dividends.
Here are five attractive preferreds, starting with three rated investment grade by Standard & Poor's, trading close to their call prices, and with call dates two to five years out:
Comcast Corp. 6.625% (CCS 24.40, +0.01, +0.03%) : Closed at $24.39 on June 2, market yield 6.7%, call date 5/15/2012, yield to call 7.9%.
General Electric InterNotes 6.50% (GEPRA 25.91, +0.12, +0.46%) : Wednesday's price -- $25.79, market yield 6.3%, call date 8/15/2013, yield to call 5.4%
JP Morgan Chase Capital SSIX 6.70% (JPMPRC 23.65, +0.12, +0.51%) : Closed on Wednesday at $23.53, market yield 7.1%, call date 4/2/2015, yield to call 8.2%
Plus, this Morgan Stanley investment-grade preferred could be called at any time, since its called date has passed, but it is trading well below its call price.
Morgan Stanley 6.25% Capital Trust III (MWR 21.27, +0.17, +0.81%) : Price on June 2 -- $21.10, market yield 7.4%, call date 3/1/2008.
With its preferreds trading so far below the call price, Morgan Stanley would probably buy back the shares on the open market rather than calling them. Morgan Stanley's balance sheet looks strong and nobody is expecting the firm to suspend its payouts.
Thus, the shares will probably eventually move back up to the $25 issue price. if so, shareholders who bought at $21.10 would enjoy 18% capital appreciation, plus the 7.4% annualized dividend yield.
If you're willing to take on more risk, consider Citigroup junk-rated (B+) preferreds.
Citigroup Capital XVII 6.35% Enhanced Trust Preferred Securities (CPRE 19.53, +0.03, +0.15%) : Closing price on June 2 was $19.20, market yield 8.3%, call date 3/15/2012, yield to call 24%
Citi's high yield to call reflects investors' skepticism about its outlook. If the market gets more positive about Citi, its preferreds would probably move back up close to the $25 issue price, rewarding shareholders with 31% capital appreciation.
Harry Domash publishes DividendDetective.com, a website specializing in high-dividend investing, and is the author of "Fire Your Stock Analyst," published by Prentice Hall. He owns or controls positions in all of the recommended preferreds.
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