"The most boring part of the stock market is foreign bank non-cumulative preferred stocks," explains Vivian Lewis, in her Global Investing Pro. (Incidentally, Vivian was the #1 performer in last year's Best Stocks report.)
"But there is money to be made if you can keep your eyes open and your wits about you. For nearly 20 years, since the vehicle was invented by Barclays plc, British (and Irish) banks have issued preferred stock in denominations attractive to yield-hungry US investors, $25 at issue.
"These preferred shares have an expiration date. They normally run for ten years, after which they may be called. (They are not always called at maturity, if the issuing bank doesn't want to repay the $25 and interest rates are close to the level at which the preferred was issued.)
"They sometimes can be called at a discount from the issue price before the ten years are up, although in a period when banks are capital-hungry this is unlikely.
"Interest is payable quarterly in US dollars. There is a bond effect at work. After the ex-dividend date, the share price tends to fall and then build up again until the next quarterly ex-dividend date. The interest is non-cumulative in order that it count as equity under British and Irish bank rules. That means if the payout is missed, it will not be made up."You can safely assume that no respectable bank would miss a payout, because of the risk to its reputation. These shares are institutional favorites and the prices can jump a lot.
"These preferred stocks trade on the NYSE but are very hard to track because the symbols different brokers use vary. (I use the unique cusip numbers to help you get the right issue.) You can view their prices weekly in Barron's if they have traded.
"While the common stock of British banks has recovered from the panicky lows, there are still bargains to be found among the preferred stocks. These are issued by British banks to enhance their capital without watering the common stock, and to benefit from tax advantages.
"Among the non-cumulative preferred shares my favorite -- and my top conservative idea for 2008 -- is the Royal Bank of Scotland preferred S, issued in June at $25 with cusip 780097739, RBSPRS.
"It pays an annual dividend of $1.6868. The preferred stock has 9 ½ years to run to its potential redemption date. This equates to 42.17 cents per quarter per share. At current prices, the dividend payout is 10.37%."
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