| Bonds Online |
 |
|
| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
|
S&P National Bond Index
|
3.00% |
|
|
S&P California Bond Index
|
2.96% |
|
|
S&P New York Bond Index
|
3.13% |
|
|
S&P National 0-5 Year Municipal Bond Index
|
0.70% |
|
|
| S&P/BGCantor US Treasury Bond |
400.09 |
|
| More |
|
| Income Equities: |
|---|
| Preferred Stocks |
|---|
|
S&P U.S. Preferred Stock Index
|
848.03 |
|
|
S&P U.S. Preferred Stock Index (CAD)
|
636.26 |
|
|
S&P U.S. Preferred Stock Index (TR)
|
1,701.05 |
|
|
S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
|
|
| REITs |
|---|
|
S&P REIT Index
|
174.07 |
|
|
S&P REIT Index (TR)
|
425.30 |
|
|
| MLPs |
|---|
|
S&P MLP Index
|
2,469.58 |
|
|
S&P MLP Index (TR)
|
5,428.50 |
|
|
See Data
|
|
|
|
 |
|
|
|
|
|
|
Does preferred stock make it preferable? |
Many income-oriented investment newsletters and Web sites advocate that conservative investors skew their portfolios toward preferred stock rather than common stock.
Investors should have a thorough understanding of this type of investment before following any such advice.
One reason is that, as we shall see, preferred stocks come in many different "flavors," and each one has its own risk and reward profile.
Additionally, it is not always obvious whether the preferred stock's dividend qualifies for the reduced 15 percent tax rate, as only a fraction of them have this desirable feature.
Preferred stocks are hybrid securities with both stocklike and bondlike characteristics but are usually closer to bonds than stocks in their risk-reward profiles.
In general, preferred stocks look a bit like common stocks because they pay dividends as opposed to interest and provide the holder with company ownership and sometimes limited voting rights.
They look a bit like bonds because unlike common stocks, the dividends of most preferred stocks are fixed. Additionally, in the event of the company's bankruptcy, the preferred stockholders get paid before the common stockholders.
Here's where things get messy.
Some preferred stocks are "convertible." This means that under certain conditions they can, at the stockholder's option, be exchanged for a specified amount of common stock. This is good because the preferred stockholder can benefit from a rise in the common stock's price.
However, some convertible preferred stocks mandate conversion by a given date rather than making it an option. This is bad because the stockholder must convert even if the common stock's price is so low that the conversion would result in a loss.
Many preferred stocks are "callable." This means that the company has the right to force the preferred stockholder to sell the stock back to the company after a specified date at a predetermined price. This is bad because if interest rates fall, the value of the preferred stock will initially rise in a manner similar to a bond; however, as the call date approaches, the value will fall back to the call price.
A limited number of preferred stocks are "participating." This means that under some circumstances, they receive additional dividends beyond the base rate. This is good because it allows the preferred stockholder to participate in the company's success.
A small number of preferred stocks, instead of paying fixed dividends, adjust them periodically based on some index; for example, the annualized quarterly dividend rate may be set at 4 percent more than the 90-day Treasury bill rate. This is good because it provides protection against rising interest rates.
Most preferred stocks are "cumulative." This is good because if the company suspends paying dividends, it must pay all past-due dividends on the preferred stock before it can resume paying any dividends on the common stock.
Preferred stock has both advantages and disadvantages over the common stock or bonds of the company.
The key advantage is high current income. Normally, the preferred stock will pay a higher dividend than the common stock, and its dividend will also be higher than the interest paid on the company's bonds.
Another advantage is relative price stability. In general, the preferred stock's price will be more volatile than the company's bonds but less volatile than the company's common stock.
The key disadvantage of most preferred stocks is the lack of inflation protection in their dividend. As we already mentioned, unlike common stocks, their dividend is usually fixed and thus its purchasing power will decline with time.
Another disadvantage is the lack of capital gains potential of most preferred stocks. The combination of the "call" date and the fixed dividend provides little opportunity for long-term price appreciation.
Another key disadvantage is that unlike bonds, some preferred stocks are "perpetual"; that is, they have no maturity date when an investor knows that her capital will be returned.
This is bad because, if interest rates increase, the dividend will be worth less, the stock price will fall and the investor may never recoup her capital.
Like bonds, preferred stocks are rated by agencies like Standard & Poor's.
The higher the rating, the less likely the preferred stock is to have difficulty paying the indicated dividend.
At PreferredsOnline, www.epreferreds.com, investors can see a list of preferred stocks with their ratings and other detailed characteristics, such as their dividend taxability.
|
|
|
|
|
|
| Partner Market Place |
|
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
|
|
| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
