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High Quality Preferred Stocks

Preferred Stock News

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Preferred Stock Facts

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Welcome to all of the new CDx3 Newsletter readers who signed up over the last month. This is your first issue of the CDx3 Newsletter, a free monthly newsletter devoted to the interests of CDx3 Preferred Stock investors.

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Quick Summary

This month's High Quality Preferred Stocks article describes how preferred stock market prices may be starting to fall back toward their more normal levels. Two months ago there were 18 investment grade preferreds selling for a market price below their $25 par value. Last month, the number jumped up one to 19. Now there are 24. Falling preferred stock market prices mean more choices offering higher yields, which is great news for buyers. (jump to article)

The Preferred Stock News article explains why the market prices of preferred stocks are substantially less volatile than those of the same company's common stock, a characteristic of preferred stocks that was on full display during November. In addition to having more stable prices, preferred stocks usually pay a higher dividend than the same company's common stock; a case where the lower risk alternative provides a greater return to investors. (jump to article)

The Special Announcement article announces the availability of a new preferred stock search engine. The Create Your Own Filter page allows preferred stock investors to instantly search all preferred stocks and exchange-traded debt securities trading on U.S. stock exchange using up to nineteen key parameters. (jump to article)

The Preferred Stock Facts article is presented both here and on the Preferred Stock Investing Reader's Forum. Test your knowledge by clicking on any preferred stock question to see the multiple-choice answers. You will receive an automatic email that provides you with the correct answer and my explanation. (jump to article)

In the Free Special Offer article I offer to provide you with some of the research from my book, Preferred Stock  Investing, Fourth Edition. I am making it available to brokers, financial planners and investment groups for free. (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.

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. The Fourth Edition is now available at your favorite online retailer. 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 Preferred Stock List^TM database and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.

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Lower Risk Preferreds Offering Less Volatility and Higher Returns

The market prices of investments that have a known return do not tend to bounce around as much as the market prices of alternatives with lesser known returns. With a known return, the speculators - those fairly certain that they know something that is unknown to others - are removed from the market.

Preferred stocks, for example, tend to show less market price volatility than common stocks for this very reason. In almost all cases, preferred stocks pay a dividend of a known amount on a known schedule.

As intuitively obvious as this seems, we rarely have an opportunity to directly measure it, but one such opportunity presented itself during November.

In the aftermath of the November 6 elections the S&P 500 Index of common stock prices fell by 5.25% (November 15) but has gradually regained most of that loss over the subsequent weeks. By plotting the movement of preferred stock market prices over the same period, we have a rare opportunity to directly compare the volatility of preferred stocks to common stocks in response to a known event.

As Figure 3 illustrates, over the last three weeks of November the market prices of preferred stocks, as reflected by the iShares US Preferred Stock ETF (PFF), followed the same pattern. But note how much less volatile the market prices of preferred stocks were over this period. While common stock prices dropped 5.25%, preferred stock prices fell less than half of that amount (-2.08% on November 15).

Preferred Dividends Versus Common Dividends

Common stocks have shown no overall price appreciation over the last thirteen years (with a couple of spectacular exceptions during 2003 and 2009). Similarly, preferred stock prices have been flat as well but for very different reasons.  In addition to having a known return, another reason that preferred stocks show less price volatility is due to their 'par' value (usually $25 per share). This is the amount that a shareholder will receive in the event that the issuing company calls the security (buys the shares back from shareholders). Since a preferred stock's par value is published in the security's prospectus and is therefore known to investors, preferred stock prices generally do not venture too far away, especially if the market believes that a call is likely.

Having little in the way of price appreciation to brag about brings investors back to the dividend opportunity offered by these two alternatives. And keep in mind that preferred stock shareholders are always paid first before holders of the same company's common stock, lowering the preferred stock investor's risk.

Common stocks have paid an average annual dividend of about 2% while preferred stocks are currently paying about 6% (about 1% below their 7% long-term average).

Real Estate Investment Trusts (REITs) tend to be a bit more generous. Figure 4 compares the dividend yields currently offered by REIT preferred stock versus the same company's common stock dividend yield. Each diamond represents a specific REIT company.

There are currently 42 high quality preferred stocks trading on U.S. stock exchanges issued by 14 REITs ("high quality" preferreds are those that meet the ten preferred stock selection criteria from my book, Preferred Stock Investing). In 11 out of these 14 cases, the company's preferred stocks are offering an annual dividend yield that outpaces the same company's common stock yield (as of November 30, 2012).

The three exceptions that you see above the Equal Yield Line are PS Business Parks (PSB), Public Storage (PSA) and Hospitality Properties (HPT). In each of these three cases, the current yield being offered by these companies' common stock dividend exceeds that available from the average dividend yield of their preferred stock offerings.

Rare Case: Lower Risk Offering Higher Return

Given the choice between two alternative investments - one with little price volatility, zero value appreciation but a current average 6% annual dividend payout versus a second alternative that has substantial price volatility, zero overall value appreciation over the last thirteen years and an average 2% annual dividend payout that you only receive after those who pick the first alternative are paid in full, which would you choose?

As evidenced by the millions of common shares that trade very day, there are certainly reasons that one would invest in common stocks rather than preferreds, but overall price appreciation performance, dividend payout and risk reduction do not appear to be among them.

More Preferred Stock Research

FROM DOUG K. LE DU

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Test Your Knowledge With These Preferred Stock Facts!