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|In This Issue...|
Amazon Puts Preferred Stock Investing On Sale - $17.15
Preferred Stock Investing, Third Edition, is now available at Amazon.com for $17.15, the best price ever for the paperback edition of the book. And Preferred Stock Investing also qualifies for Amazon's great free shipping program. The book normally sells for $19.95 so Amazon is really making you a great deal here (see Preferred Stock Investing at Amazon.com).
Also on the book's Amazon page you can use Amazon's Look Inside feature to look through the book itself before you buy!
Reader reviews are also available. See why Preferred Stock Investing is one of the highest reader-rated books that Amazon carries (Preferred Stock Investing sells within the top 2 percent of all U.S. book titles, out of about 5 million!).
And remember that by following the instructions on page 1 of chapter 15 readers of the book are entitled to free periodic updates as long as the third edition of Preferred Stock Investing remains in print.
If you have yet to pick up your copy of Preferred Stock Investing, Third Edition you can do so at any of your favorite online retailers (see retailers). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free 2010 update.
Just Posted On The Preferred Stock Investing Reader's Forum: Municipal bonds, issued by state and local governments, are under an enormous amount of pressure as government budgets shrink. In a February 18 post to the Preferred Stock Investing Reader's Forum (my blog) titled "New Fitch Muni Bond Rating Method Spotlights Three Nuveen Preferred Funds" I explain how a new formula now being used by Fitch to rate state and local government pension funds may affect preferred stock holders of Nuveen Investment's preferred stock funds. (jump to Forum)
The Last Month's CDx3 Investor Results article illustrates the effect that the Federal Reserve's two-headed cheap money program has had on banks, businesses and savers. While great for banks and businesses looking to issue inexpensive bonds, the Fed's policy has been brutal on savers, pushing bank CD interest rates below 2%. The article goes on to identify 45 high quality preferred stocks that are offering a 7% alternative, available right now for less than $25 per share. (jump to article)
The Special Announcement article provides you with an updated list of trust preferred stocks (TRUPS) that will be among the first to be affected by Section 171 of the Wall Street Reform and Consumer Protection Act. Remember that subscribers to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive this same list with all of the trading symbols. This month's list identifies seventeen of the highest rated, highest quality trust preferred stocks. Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Third Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article)
In the CDx3 Company Spotlight article I introduce you to HCP, Inc., the country's sixth largest Real Estate Investment Trust now celebrating its 25th anniversary. HCP owns over 500 healthcare related facilities across the United States. The article illustrates the aging demographics of the U.S. population and how HCP has positioned itself directly in front of that inevitable parade. (jump to article)
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's question - "How can I tell if there is strong demand for a preferred stock?" (jump to article)
Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. In the Free Special Offer article below I provide you with a link that allows you to receive my posts via an email message rather than having to visit the Forum to see what's new. Any time a new article is posted, you will receive a message in your email inbox automatically - free. (jump to article)
Coming Up For Preferred Stock Investors: Turmoil in the Middle East has created an opportunity for preferred stock buyers with respect to six specific high quality preferred stocks issued by two different companies. (jump to article)
Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Fed's Low Yield Policy Great For Banks, Businesses; Decimating For Savers
Take Your Pick: 45 Investment Grade, Cumulative Preferred Stocks Delivering 7%
Thanks to the Federal Reserve, high quality preferred stocks are now generating about 42% more income than the highest rated corporate bonds, preferred stocks that, in many cases, are issued by the same companies as those bonds.
In a March 2 article Michael Gross, leader of PIMCO, the world's largest bond fund, makes the case that the Federal Reserve's Quantitative Easing program ("QE2") is putting significant downward pressure on treasury bond yields, just as the program was intended to do. Gross goes on to point out that when the QE2 program comes to an end, now scheduled for June, investors should look for treasury yields to head up, the stops having been removed.
The idea behind QE2 is that by the Fed purchasing $600 billion in treasury bonds from its member banks, these securities are removed from the bond market, substantially reducing supply. Investors looking to make bond purchases will therefore have to pay more than they would have otherwise. Because investors have more of their money invested per share, the return on their investment (the yield) goes down accordingly. Lower treasury bond yields make it cheaper for companies to issue corporate bonds since the rates of the two relate directly to each other in the marketplace.
Ironically, the yields on 5- and 10-year treasuries have done nothing but increase since the Fed announced QE2 last November. This unexpected result is explained by Fed officials saying that, even though yields have increased rather than decreased, the amount of the increase has been substantially dampened by the Fed program which is, therefore, a roaring success.
In addition to the yields of corporate bonds being lower than they would have been otherwise, the Fed's policy of cheap money has also pushed down the interest rates being offered by bank Certificates of Deposit (CDs). A near-zero federal funds rate has allowed member banks to generate small but no-risk profits by borrowing at zero from the Fed and using the proceeds to buy treasury bonds, providing some much welcomed relief for banks still dealing with high loan delinquencies, mortgage foreclosures and commercial real estate vacancies. So the policy has been helpful for banks, now cash-flush and more profitable.
Savers Take The Hit
But for savers (bank CD investors), the policy has been brutal. Figure 1 shows the yields being offered by 2-year bank CDs (average of top 10 U.S. yields, source: BankRate.com) and investment grade corporate bonds. By holding the federal funds rate at near-zero, and by using QE2 to put downward pressure on treasury bond yields as well, individual investors planning on a return on their nest egg north of 5 percent have been decimated. Bank CDs are paying less than 2 percent while investment grade corporate bonds are around 5 percent. And that's before you subtract out income taxes and inflation.
Now look at the yield currently being produced by high quality preferred stocks. A dollar invested in these high quality preferred stocks would earn 7.39 cents while that same dollar invested in investment grade corporate bonds would leave you with 5.22 cents a year later. That's a 42 percent improvement in your income.
The Top 45 Preferred Stocks To Pick From
Figure 2 lists 45 of the highest quality preferred stocks available on U.S. stock exchanges. These preferred stocks are issued by 19 different companies in 11 industry segments.
This same list, with trading symbols, was presented to CDx3 Notification Service subscribers in the March issue of the subscriber's newsletter, CDx3 Research Notes (note that the trading symbols are obscured here in order to protect the values of subscriptions to the CDx3 Notification Service, my preferred stock email alert and research newsletter service. Subscribe for symbols).
Notice that all 45 of the high quality preferred stocks listed in Figure 2 were available for a market price less than $25.00 on Friday, February 25 when this table was created. The top fifteen have yet to reach their call dates while the remaining 30 have exceeded their respective call dates.
Purchasing your shares for a price less than $25.00 is important since, if the issuing company retires ("calls") the security, shareholders will receive $25.00 per share (the "liquidation price"). So investors who purchase their shares for less than $25.00 receive two additional benefits: (1) an additional layer of principal protection and (2) an opportunity for a capital gain in the event that the shares are retired downstream.
Higher Quality Means Lower Risk
Of the 917 preferred stocks currently trading on U.S. stock exchanges, these 45 are the highest quality preferred stocks that are available for less than $25.00 per share right now. "High quality" means that these specific preferred stocks:
If your nest egg needs to be producing an annual return north of 5 percent the Fed's low yield policy, while helpful for banks and companies needing to issue cheap bonds, is not designed to benefit savers. The next best alternative: the highest quality preferred stocks that are selling for less than $25.00 per share.
Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks
Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.
UPDATED: This Month's Under $25 Trust Preferred Stock List
These 17 Preferreds Will Be Among The First To Come Under The Wall Street Reform Act
This month there are 17 preferred stocks offered by our Big Banks that provide a potential layer of principal protection not available with many other preferred stock issues. This table presents an updated list of Big Bank-issued trust preferred stocks (TRUPS) that will be among the first affected by section 171 of the Wall Street Reform and Consumer Protection Act, signed into law on Wednesday, July 21, 2010.
Section 171 creates the largest single opportunity for preferred stock investors in history (how's that?). And like most investments, the highest returns will tend to favor those who get in earlier rather than later.
Effective January 1, 2013, the new law prohibits Big Banks (assets greater than $15 billion) from counting their TRUPS in their "Tier 1 Capital" calculation, a measure regulators watch when assessing the adequacy of a bank's reserves. These Big Banks are therefore likely to retire ("call") their TRUPS. Investors who hold shares of a TRUPS when it is called will receive $25.00 per share, so investors who purchase shares now for less than $25 position themselves for a capital gain on top of the above-average dividend income that they will be earning in the meantime.
Buying your shares for less than $25 provides a layer of protection for your principal.
The far right column of this table shows you the effect that adding a capital gain onto the regular quarterly dividend income has on your Effective Annual Return...courtesy of the U.S. Government.
By watching this list each month, you will be able to monitor this opportunity as the January 1, 2013 implementation date approaches (expect prices to generally increase toward $25.00 per share).
Since market prices change every day, the list of affected TRUPS selling for less than $25 per share changes as well. So I will provide you with an updated list in this Special Announcement article every month. These are the highest rated, highest quality issues that are going to be first affected by section 171 of the new law that are also selling for less than $25 per share right now.
Subscriber's to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) are provided with this same TRUPS list, including the trading symbols, on page 7 of each monthly issue of the subscribers' newsletter, CDx3 Research Notes. Please consider becoming a subscriber to the CDx3 Notification Service today.
Brokers And Investment Groups: New Meeting Materials Now Available
As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service.
My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing.
The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing.
The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts:
Part 1: Approach and Objectives To Preferred Stock Investing
Part 2: How and When To Buy and Sell Preferred Stocks
Part 3: Preferred Stock Investing Resources
To request the Preferred Stock Investing Group Materials just send an email request to:
You will receive an auto-reply email message with current download instructions.
Who Are These Companies That Issue CDx3 Preferred Stocks?
HCP, Inc. (NYSE: HCP)
Formerly known as HealthCare Properties, HCP is a $13 billion company founded in 1985 and headquartered in Long Beach, California. HCP is the country's sixth largest Real Estate Investment Trust. HCP develops and operates 573 healthcare related facilities throughout the United States including senior housing, life science, medical office, hospital and skilled nursing facilities.
HCP's return to investors has consistently exceeded that from most other REITs and the S&P500. This first chart from HCP's 2010 Annual Report illustrates the results of investing $100 on January 1, 2006. The chart assumes reinvestment of dividends before income taxes. The Equity REIT Index is provided by the National Association of Real Estate Investment Trusts, Inc. HCP has a history of strong financial performance and growth through acquisition.
But what HCP's chairman and CEO James Flaherty is really excited about is the company's future. HCP's business strategy, and therefore its future success, is tied directly to the healthcare needs of an aging U.S. population. As Flaherty puts it on the company's website:
"It will be THIS decade when we will finally realize the long-anticipated spike in demand for healthcare properties as aging baby boomers move into their Golden Years. A decade ago, we were essentially chasing the trend — today, we are positioned to catch the benefits of this demographic certainty. This has been made possible by the strategic portfolio repositioning that was completed during the latter half of the last decade."
U.S. Census Bureau estimates show that the percentage of our population in the 75-84 age group will climb from today's 8% to about 45% by 2050. According to CMS, on a per capita basis, the 75-year and older segment of the population spends 76% more on healthcare than the 65 to 74-year-old segment and over 200% more than the population average.
With healthcare expected to be 17.7% of the U.S. GDP in 2010 (Source: Centers for Medicare and Medicaid Services (CMS), based on the National Health Expenditures report released in January 2009), you can see why Flaherty remarked in March 2009 that HCP is "...the leading real estate investment trust in the largest industry in the largest economy in the world."
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. Companies can issue multiple series of preferred stocks, some of which may meet the CDx3 Selection Criteria while others do not.
How can I tell if there is strong demand for a preferred stock?
Gauging market demand for a preferred stock that you are considering is different than performing the same exercise when considering a company's common stock. With common stock, judging market demand can be as simple as looking at the movement in market price over time; a steadily increasing market price can indicate strong demand. Demand for common stock is usually driven by a market belief that improved profitability is right around the corner.
But with preferred stock there are other market forces that influence market price. My book, Preferred Stock Investing, illustrates the Three Rules of Market Price Predictability. One of these Rules is called the Rule of Buyer/Seller Behavior and governs the market price behavior of a preferred stock over the short-term period of a single dividend quarter.
It is because of the Rule of Buyer/Seller Behavior that gauging market demand for a preferred stock is fundamentally different from doing so for a common stock. Using this Rule, we can not only determine whether market demand is stronger or weaker than we would expect, but we can actually quantify that strength or weakness.
Per the Rule of Buyer/Seller Behavior, a preferred stock that is closer to its dividend pay day takes on more value (demand) than an otherwise identical preferred stock that is further away. Makes sense.
But notice how this has nothing whatsoever to do with how the market feels about the company's profitability prospects. Since preferred stock dividends are known in advance, the company's ability to pay the upcoming dividend is more closely tied to cash flow than to quarterly profits. So the proximity of the upcoming dividend in time becomes the key driver of market price.
And just as an approaching dividend pay day (the "ex-dividend date") puts upward pressure on the market price of a preferred stock (beyond what it would be otherwise), downward pressure is exerted as soon as that pay day comes and goes (i.e. the passing of the ex-dividend date) and a new dividend quarter begins.
The question this month for preferred stock investors:How can I tell if there is strong demand for a preferred stock?
The market price increases over time
(C) The market price drops by less than the dividend after the ex-dividend date
The correct answer to this question is (C), the market price drops by less than the dividend after the ex-dividend date.
The Rule of Buyer/Seller Behavior (Preferred Stock Investing, page 43) tells us that the market price of a preferred stock will tend to increase, beyond where it would have otherwise, as the dividend pay date (the ex-dividend date) approaches. In a theoretical perfect market, this increase would be for the exact amount of the upcoming dividend payment.
Then, continuing our perfect market scenario, the market price would drop by exactly the amount of the quarterly dividend once the ex-dividend date passed and the process would start all over again. For example, a preferred stock that pays an 8 percent annual dividend generates $2.00 per share per year. That's $0.50 per quarter. So, in a theoretical perfect market we would expect to see the market price increase throughout the quarter, reaching an increase of $0.50 the day prior to the ex-dividend date. On the next day (the ex-dividend date) we would then expect to see the market price fall by $0.50 and the process would start over again.
But the market is never perfect, of course. Disruptive events (a Global Credit Crisis, geopolitical flare-ups) alter the behavior of buyers and sellers and motivate them to make decisions that are different than they would otherwise make.
By comparing the actual price change throughout a dividend quarter with our expected price change (the dividend amount) preferred stock investors can determine if there is strong or weak demand for a specific preferred stock.
In the case of our 8 percent preferred stock example, if the market price drops by, say, $0.20 following the ex-dividend date (rather than the expected $0.50), there is very strong demand in the marketplace for this preferred stock. During February 2011, there was very strong demand for high quality preferred stocks. Issues that pay an average of $0.45 per share saw a market price drop of only $0.31 as they cleared their ex-dividend dates.
Where common stock investors frequently look at market price trends over time to gauge market demand for a common stock, preferred stock investors have a much more direct metric that actually allows us to quantify the level of market demand for a preferred stock every quarter in much less speculative fashion. Chapter 3 of Preferred Stock Investing includes actual market data and a chart that illustrates this mechanism.
You can submit your own preferred stock question: Submit your question.
Preferred Stock Market Research Now Available All Month Long - Free
Automatic Email Delivery Of Preferred Stock Market Research Now Available
Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high-quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month.
A separate window from FeedBurner (a Google service) will open on your screen. Enter and verify the email address that you want articles from the Forum to be emailed to as instructed. And don't worry - you'll never receive any spam from me and your email address will not be shared.
By receiving the articles as I post them via email, you do not have to visit the Forum in order to stay plugged into my research regarding the marketplace for the highest quality preferred stocks.
You are also invited to visit the Forum and comment on my articles.
Middle East Turmoil Pushes Six Preferred Stocks Into Buyer's Crosshairs
Dividend Cut-Off Dates Coming Up, Not Too Late To Bag 90 Days Dividend Cash
The turmoil in the Middle East has created an opportunity for preferred stock buyers, especially with respect to the specific six high quality preferred stocks shown in this table. The ex-dividend dates of these six preferred stocks are coming up this month too. If you are going to make a purchase, be sure that you do so before the indicated dates.
Why these six? Savvy preferred stock investors can often take advantage of the misinformed selling activities of overly sensitive common stock investors. Common stock investors, focused on a company's future profitability expectations, will frequently sell their positions if there is a hint of a down-tick. Many times in such circumstances, common stock investors will sell both common and preferred stock positions, forgetting that preferred stock dividends are more closely tied to a company's cash flow than to this quarter's profits.
This type of short-term thinking by common stock investors can create buying opportunities for longer-term preferred stock investors as prices of a company's preferred stocks temporarily dip below $25 and into buying territory. And nothing sends common stock investors to the exits faster than a highly visible and well publicized geopolitical boil-over.
Enter Libyan leader Muammar Gaddafi.
The turmoil in the Middle East puts six specific high quality preferred stocks, issued by two different companies, directly in the crosshairs for preferred stock buyers. The reason, of course, is the effect that these latest Middle East events have on oil prices.
Increasing oil prices eventually affect the price of all things that need to be transported, which is pretty much everything. But long before that happens there is a more immediate affect felt by companies related to transportation. And, even more specifically, such companies that are among the issuers of the highest quality preferred stocks. It is these companies that we are interested in.
There are two companies that issue preferred stocks that are (1) rated investment grade by Moody's and (2) have the 'cumulative' dividend requirement (meaning that in the unlikely event that the company misses a dividend payment they still owe you the money). And both of these companies have a perfect track record of never having missed a preferred stock dividend payment.
The table you see here was generated using the Preferred Stock ListTM software application provided to those subscribing to the CDx3 Notification Service, my preferred stock email alert and research newsletter service (note that in order to protect the value of subscriptions the trading symbols have been obscured here). These are the six U.S.-traded preferred stocks that are not only among the highest quality issues available, but are also very likely to be available to buyers for bargain prices due to the turmoil in the Middle East.
Page 5 of the March 2011 issue of the subscriber's newsletter, CDx3 Research Notes, identifies these two companies.
For an added bonus: this table is sorted by ex-dividend date. Remember, whomever owns the shares of a preferred stock on the morning of its quarterly ex-dividend date when the market opens will receive the upcoming quarterly dividend cash from the issuing company. That means that even if you only own your shares for a few days you will receive 90 days of dividend income. Take note of the ex-dividend dates of these six high quality preferred stocks and be sure that if you are going to make a purchase that you do so before the date indicated here.
Thank you very much for your interest in my research. As always, I look forward to reporting 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 investing 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
for non-experts please have them send an email
they will automatically
begin receiving this monthly CDx3
next month (plus a
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 investing 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-experts please have them send an email message to:
and they will automatically begin receiving this monthly CDx3 Newsletter next month (plus a CDx3 Special Report) - all FREE.
Many Happy Returns,
Doug K. Le Du
Copyright (c) 2011 by Doug K. Le Du
Preferred Stock List, 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.
Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies.
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.