ďI have been a retail stock broker for 21 years...15 years with [a global brokerage who] had a very good research department...but I must say that your knowledge and screening process on preferreds is the most magnificent work I have ever seen.Ē - Jeff M., CDx3 Notification Service subscriber
|In This Issue...|
Just Published: The Third Edition of Preferred Stock Investing is now available!
The Third Edition of Preferred Stock Investing includes all of my latest research regarding the market price behavior of high quality preferred stocks. Five new chapters and 70 additional pages use real preferred stocks to show you how to screen, buy and sell the highest quality issues, even during a Global Credit Crisis.
Chapter 15 lists all qualifying preferred stocks that have been issued since January 2001 and shows you how you would have done by using the investment method described throughout the book for each one. And the book includes all of the web sites and other resources that are used to implement the CDx3 Income Engine on your own.
The Third Edition of Preferred Stock Investing, the manuscript of which was reviewed by several dozen readers and subscribers before going to the publisher, is my most comprehensive work yet and it is now available at your favorite online retailers (see retailers).
Attention Former Citigroup Preferred Stock holders: I have posted a table on the Preferred Stock Investing Reader's Forum that allows you to calculate the market price that Citi's common stock must reach in order for you to be cash-even on your converted Citi preferred stock shares. To use the table, look down the first column and find the purchase price that you originally paid for your Citi preferred stock. The value in the second column is the market price that Citi's common stock must reach for you to break even.
What goes down must come up. 6.6% of the cash that investors have had sitting in money market funds has come back into the market since March. The Last Month's CDx3 Investor Results article below shows you the effect that this re-entrance of investor cash has had on the market price of the highest quality preferred stocks versus the S&P 500 over the same period.
If you subscribe to my CDx3 Notification Service (what's this?) and later change your mind, I am offering a money back guarantee as described in the Special Announcement article. This announcement formalizes a policy that I have had since I started the CDx3 Notification Service several years ago. The features and benefits of the CDx3 Notification Service need to support your investment objectives; if you decide to go a different direction, you're covered.
In the CDx3 Company Spotlight article I introduce you to Alliant Energy Corporation. Now 92 years old, Alliant just received approval for a 32,500 acre wind power project. Read about how Mother Nature has cut both ways at Alliant, providing enough wind energy to power 50,000 homes in Alliant's service area while devastating its customers, employees and corporate headquarters when Cedar Rapids, Iowa flooded last year.
The CDx3 Question of the Month is presented both here and on the Preferred Stock Investing Reader's Forum. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article. This month, I answer the question "which of these CDx3 Preferred Stocks provides the best overall annual return?"
I am committed to making certain that readers understand how the CDx3 Income Engine (the preferred stock investing method described throughout my book, Preferred Stock Investing) is being used during this credit crisis. In the Free Special Offer article below I am providing you with a free downloadable copy of my Quick Guide To Preferred Stock Investing During A Global Credit Crisis. This Quick Guide provides you with a summary of how to use the highest quality preferred stocks to earn above average dividend income while simultaneously creating multiple downstream capital gain opportunities.
Coming Up For Preferred Stock Investors: The Market for the highest quality preferred stocks may have reached a major milestone during the first week of August, just as I am sending this issue of the CDx3 Newsletter to you; a milestone that has alluded us for two years now.
During the first week of August The Market priced CDx3 Preferred Stocks issued by banks, and those issued by non-banks, such that their average yield is at the same level - 8.4%, as illustrated by the chart that I present at the bottom of this CDx3 Newsletter.
Does this mean that The Market is no longer assigning additional investment risk to bank-issued preferred stocks?
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Cash Comes Out Of Savings Accounts And Into CDx3 Preferred Stocks
S&P 500 Up 46%; CDx3 Preferred Stocks Up 78%
The financial press is reporting that cash is coming out of money market accounts and back into the market by the bucket. After reaching a near 20-year high in March, money market accounts have shrunk by 6.6% (source: Bloomberg, July 23, 2009). Since it bottomed out on March 9, 2009 the S&P 500 stock market index has recovered nicely - up 46% - so I think we can conclude that the financial press has probably got it right.
But a closer analysis shows where the action really is. I went back to March 9, 2009 and calculated the average market price of CDx3 Preferred Stocks on that day then made the same calculation for the end of each month through the end of July.
Since the beginning of this year I have made the point that during economic recoveries the market will tend to recover first since investors are motivated to get in early. And the market recovery tends to start with the highest quality, lowest risk bonds and preferred stocks.
As welcome as the 46% increase by the S&P 500 index has been, the average market price for the highest quality preferred stocks ("CDx3 Preferred Stocks") has increased an astounding 78% since March 9, 2009. While the cash coming out of money market accounts since March is, in fact, going back into the stock market, this recovery, like many before it, is starting with the lower risk alternatives first - CDx3 Preferred Stocks.
Are You Too Late?
Based on what is starting to be a pretty high pile of positive indicators, most economists and analysts are starting to agree that the economy, while still having a long way to go, has turned the corner toward recovery. The massive amounts of cash coming out of savings and into low risk investments is certainly consistent with this view.
But seeing this type of recovery in living color (see chart at right) leads directly to the next question: is there still enough upside to take advantage of the recovery or are you too late?
Without being clairvoyant, no one knows the answer to that question for sure. But consider the following calculation (I presented this calculation for just bank-issued CDx3 Preferred Stocks in the May issue of the CDx3 Newsletter; here it is for CDx3 Preferred Stocks overall).
As a group, these CDx3 Preferred Stocks have an average declared annual dividend rate of 7.41% and their current (July 31, 2009) average market price is $19.91 (thatís an average annual dividend yield of 9.03% for this group). So if you were to purchase this group today, you would pay $19.91 per share on average.
As the economy recovers over the next couple of years, declared dividend rates being offered by new CDx3 Preferred Stock issues will fall off of their current historically high 9.17% average toward a more normal 7% or so. Remember that new CDx3 Preferred Stocks are always introduced at a market price of $25 per share.
To calculate the remaining potential capital gain of this group we therefore need to answer this question: If a CDx3 Preferred Stock with a 7% dividend sells for $25, what market price will 7.41% (this groupís average declared dividend) sell for?
Answer: $26.46 per share. ($25 x 7.41%) / 7%.
In other words, as dividend rates fall back to a more normal 7%, this group will yield 7% when its average market price rises to $26.46 per share. Today, you can buy a share of this group for an average market price of $19.91 per share. Buying now for $19.91 and selling downstream for $26.46 delivers a $6.55 per share (potentially another 33%) capital gain to you for this group of CDx3 Preferred Stocks.
How do you position yourself to take advantage of it? Subscribers to the CDx3 Notification Service receive their own monthly newsletter called CDx3 Research Notes. Along with the results of my ongoing preferred stock research, each month's issue identifies the trading symbols for CDx3 Preferred Stocks that, research shows (Preferred Stock Investing, chapter 10), are at a point in time that tends to most favor buyers. To ride the recovery wave with the highest quality preferred stocks, you should consider subscribing to the CDx3 Notification Service. We do all of the research and calculations for you and you receive an email message when there is a buying or selling opportunity coming up for the highest quality preferred stocks.
Money Back Guarantee For CDx3 Notification Service Subscribers
Explicit, Written Guarantee Protects Preferred Stock Investors
70 million Americans started retiring last year and high quality preferred stocks, in my view, are underrepresented to this group. After researching preferred stocks for many years, I firmly believe that they can represent a very attractive investment choice for many individual investors.
In the face of the research data presented in chapter 15 of Preferred Stock Investing, I think that my position on this point is pretty hard to argue with.
The CDx3 Notification Service is, by far, the most comprehensive information resource for the highest quality preferred stocks available anywhere.
But I understand that your investment plans can change over time. So I wanted to be sure that you understand that if you subscribe to the CDx3 Notification Service, but later feel like you need to take a different direction, you're covered. Any unused portion of your annual subscription fee to the CDx3 Notification Service will be promptly refunded to you. I guarantee it.
Right on page 1 of the subscription agreement you will find this written commitment from me:
"You are entitled to a prorated refund of the subscription fee, equal to the unused months prior to your expiration date times the calculated monthly subscription amount which is the subscription fee divided by twelve (12), should you choose to cancel your subscription. You can cancel your subscription at any time by sending an email message declaring your cancelation to [Customer Support]."
The latest research, continual updates on preferred stocks and market trends, advance notification of buying and selling opportunities of just the highest quality issues and much more. But if you decide that the CDx3 Notification Service is no longer for you, no problem. You will receive a prompt refund of the remaining portion of your subscription fee and our best wishes.
While most subscribers are individuals just like you, all of the biggest, and many of the smallest, investment firms in the United States subscribe to the CDx3 Notification Service. If you want to start adding the highest quality preferred stocks to your portfolio, while we do the research and calculations for you, maybe it's time that you joined them.
Who Are These Companies That Issue CDx3 Preferred Stocks?
Alliant Energy Corporation (NYSE: LNT)
Alliant Energy Corporation was founded in 1917 and is the $2.9 billion parent company of Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL). Through these two subsidiaries Alliant's 5,318 employees provide electric and gas utility services to more than 1.4 million customers throughout Iowa, Minnesota and Wisconsin.
Following on the heals of the December 2008 launch of its 68 megawatt Cedar Ridge Wind Farm, on July 9, 2009 Wisconsin regulators approved Alliant's second wind project, the Bent Tree Wind Farm. The Bent Tree project will be built on a 32,500 acre parcel and generate 200 megawatts of wind energy, enough to power 50,000 homes. To read more about Alliant's Bent Tree Wind Farm click here.
But for most utilities, including Alliant, Mother Nature plays both sides. Just as the winds of Wisconsin provide a clean energy opportunity, floodwaters in June 2008 took out Wisconsin's Lake Delton, emptying the entire lake, all at once, into the Wisconsin River. Rapid City, Iowa was quickly covered by nine square miles of water - equal to 1,300 city blocks. Miles of Alliant's electrical lines and natural gas connections were suddenly useless.
On March 11, 2009 Alliant was presented with the Edison Electric Institute's (EEI) 2008 Emergency Recovery Award. In presenting the award EEI's President, Thomas R. Kuhn, said "IPL did not miss one beat in restoring power to its customers, even after losing their corporate facility to the devastating flood."
Alliant Energy Corporation is an issuer of CDx3 Preferred Stock.
Reader Note: The purpose of the CDx3 Company Spotlight article is to give you a sense of the types of companies that issue CDx3 Preferred Stocks. Companies that appear in the CDx3 Company Spotlight either currently, or in the past, have issued CDx3 Preferred Stocks. Since I am not familiar with your financial goals, resources or risk tolerance, my mention of these companies here should not be taken as a recommendation by me for you to buy, or not buy, securities issued by these companies.
Which of these CDx3 Preferred Stocks provides the best overall annual return? - Preferred Stock Investing Reader's Forum.
The preferred stock research presented in my book, Preferred Stock Investing, identifies when the market price of the highest quality preferred stocks is likely to favor buyers and, later, sellers.
Using the method described throughout Preferred Stock Investing, CDx3 Investors use the highest quality preferred stocks to earn above average dividend income while simultaneously creating multiple downstream capital gain opportunities.
When making a buy or sell decision, investors naturally want to have some idea, given the market prices at the time, of the rate of return that they might realize. It sounds like a straightforward enough question and it is - once we get some clarification.
...New Forum Feature - Test Your Knowledge
But before I dive into this question, I have posted this CDx3 Question Of The Month on the Preferred Stock Investing Reader's Forum (the Forum is free to you, no password required) for you to look over. When you click on your answer to the question (multiple choice), you will receive an automatic email message that provides you with the correct answer and my write-up explaining the answer.
If you want to test your knowledge about preferred stocks and investing in them, go to the Preferred Stock Investing Reader's Forum and scroll down on the right side to the feature "Surveys, Questions - Test Your Knowledge." There, you will see this month's question. Just click on the question to test your knowledge.
If you do not want to spoil it, go to the Forum now then come back after you've clicked on your answer before you read any further here.
Here is the answer to the question "Which of these CDx3 Preferred Stocks provides the best overall annual return?"
(a) Preferred Stock A: 8.0%
declared dividend rate,
purchased for $24 per share at
To make this easier to follow I have made these three CDx3 Preferred Stocks identical except for the point in time when you make your purchase. The declared dividend rate of all three is the same (8%) as is your purchase price ($24 per share). To further simplify things, let's assume that the issuing company calls the preferred stock on its call date five years after its IPO (for $25 per share as is most common).
The answer is (c).
Here's why: When determining the annual return of a preferred stock investment there are really two considerations - (1) the dividend "yield" and (2) the overall effective annual return (EAR), which is really the point of this question.
Since these three preferred stocks all have the same declared dividend rate and purchase price, the dividend "yield" is going to be the same for all three. Dividend yield is calculated by this formula:
Dividend yield = ([dividend rate] x $25) divided by [purchase price]
Substituting our values: (8.0% x $25) divided by $24 equals a dividend yield of 8.33% for all three of our alternative preferred stocks. Now let's move on to the overall annual return, which is really what we're after.
Notice that we own Preferred Stock A for five years and, therefore, collect five years worth of dividend income before the call. With Preferred Stock B, however, we only collect four years worth of dividend income. And, since we purchase Preferred Stock C two years after IPO, we only earn three years worth of dividend income with that alternative.
It is tempting to think that, because we own Preferred Stock A longer (having purchased it when it was first introduced) and collect more dividend income, we must earn the highest effective annual return with A. While it is true that your dividend income is greater with Preferred Stock A than with B or C, the effective annual return calculation considers something called the "time value of money."
The time value of money accounts for the length of time that it takes to earn the income generated by an investment; the faster, the better.
With Preferred Stock C, you make less dividend income (since you only own it for three years rather than five), but the dividend income that you do earn (three years worth) is made in a much shorter period of time, boosting your effective annual return.
The actual effective annual return values for our three alternative preferred stocks are:
All other things being equal, due to the time value of money, your effective annual return is higher when you make your dividends in a shorter period of time rather than having earnings stretched out over a longer period of time. This simple example illustrates the importance of "running the numbers" before you invest.
Each month, subscribers to the CDx3 Notification Service receive a list of CDx3 Preferred Stocks that, research shows, are at a point in time that tends to favor buyers. And both the yield and effective annual return values are calculated and presented for each CDx3 Preferred Stock. We do the research and calculations, you make the decisions.
The CDx3 Special Report titled "Calculating Your Rate of Return" is free to CDx3 Newsletter readers (download PDF) and provides a step-by-step example of how the EAR calculation is made for preferred stock investments (the Microsoft Excel cell formulas are also provided).
Many CDx3 Newsletter readers have been with me for quite some time. And from the email that I receive I know that many of you have read Preferred Stock Investing and have implemented the CDx3 Income Engine on your own (the book includes all of the resources needed to do so without the CDx3 Notification Service).
The 25-month long Global Credit Crisis has shaken our financial system and everyone who is invested in it (which is just about everyone). Even though the CDx3 Selection Criteria, day after day, have successfully filtered out the preferred stocks from every failed bank for over two years now, and even though there has not been so much as a missed dividend for those who have invested in CDx3 Preferred Stocks, there's still some anxiety.
And that's what concerns me the most. As a researcher, I have an enormous volume of data regarding the market price behavior of CDx3 Preferred Stocks.
I can not only explain this market price behavior but I have the data needed to support my observations. Chapter 15 of Preferred Stock Investing includes the investment results, using the CDx3 Income Engine, for every qualifying preferred stock issued since January 2001.
Whether market prices are driven down by uncertainty related to war (2002) or by a Global Credit Crisis (2007-09), the market prices of CDx3 Preferred Stocks behave in certain ways at certain times.
To thank you for your interest, and to provide you with some very timely insights, I have published a "Quick Guide To Preferred Stock Investing During A Global Credit Crisis."
This is an important and timely document that all who are interest in using the highest quality preferred stocks to benefit from this credit crisis should read. Understanding the CDx3 Income Engine is more important now than ever.
Enjoy reading the Quick Guide and thanks again for your interest in my preferred stock research.
Bank And Non-Bank Preferred Stocks Reaching Parity
Has A Fearful Market Finally Exhaled?
For the better part of two years now The Market has viewed banks, and everything connected to them, with a skeptical eye. Since June 2007, as perceived investment risk climbed, market prices fell pushing the yields for many bank-issued preferred stocks above 15% and some even higher.
The market prices of preferred stocks issued by non-banks were hurt too, but nothing like those from banks.
Until this week.
As illustrated by the chart accompanying the Last Month's CDx3 Investor Results article at the top of this CDx3 Newsletter, the market prices of CDx3 Preferred Stocks have gone back up, including those issued by banks, lowering their yields accordingly.
And during the first week of August, for the first time in many months, the yield being offered by CDx3 Preferred Stocks issued by non-banks and that from those issued by banks, reached parity. The Market is no longer making a risk distinction between CDx3 Preferred Stocks issued by banks and those issued by non-banks. The Market is now pricing the preferred stocks offered by both groups at 8.4%.
Temporary exception or another sign that the worst is behind us?
I will report back to you in next month's issue of the CDx3 Newsletter.
to screen, buy and sell the highest
quality preferred stocks by
the third edition of my book, Preferred
Stock Investing (see
retailers). The book identifies
the resources that you need to be a very
successful CDx3 Investor completely on
your own. If you would rather we do the
research and calculations for you I
CDx3 Notification Service.
15 of Preferred Stock Investing
includes a list of all of the CDx3
Preferred Stocks issued since January
2001 and the investment results you
would have achieved had you invested in
them using the CDx3 Income Engine.
readers also receive free periodic
updates to the preferred stock lists in
chapter 15 as long as the Third Edition
of the book is in print.
take a look at
And if you
someone who might be interested in simple
experts please have them send an email
they will automatically
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CDx3 Special Report) - all FREE.
Chapter 15 of Preferred Stock Investing includes a list of all of the CDx3 Preferred Stocks issued since January 2001 and the investment results you would have achieved had you invested in them using the CDx3 Income Engine.
And readers also receive free periodic updates to the preferred stock lists in chapter 15 as long as the Third Edition of the book is in print.
Please take a look at www.PreferredStockInvesting.com. And if you know someone who might be interested in simple investing for non-investment experts please have them send an email message to:
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Many Happy Returns,
Doug K. Le Du
Copyright (c) 2009 by Doug K. Le Du
CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du. All rights reserved.
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DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.