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|In This Issue...|
New Fourth Edition of Preferred Stock Investing!
Readers of Preferred Stock Investing learn how to screen, buy and sell the highest quality preferred stocks.
The Fourth Edition is now available at your favorite online retailers (see retailers).
The Fourth Edition of Preferred Stock Investing includes the latest research and updated charts and examples using real preferred stocks.
And Part III "Buying When The Market Favors Buyers" has been completely re-written to focus on the buying conditions that we will be facing throughout 2012. Check out the new Fourth Edition Table of Contents.
The preferred stock investing method explained throughout the book - the "CDx3 Income Engine" - uses three rules and ten selection criteria to accomplish its three objectives: maximize revenue while minimizing risk and minimizing work. The results are itemized in chapter 15 for every qualifying preferred stock issued since January 2001.
A new chapter has also been added (chapter 11, "The Crisis That Keeps On Giving") that describes two specific opportunities for preferred stock buyers. Both of these opportunities were created by the 2007 - 2009 Global Credit Crisis and are expected to remain available well into 2012.
Preferred Stock Investing is one of the highest reader-rated books available at Amazon. Look for your copy of Preferred Stock Investing, Fourth Edition at your favorite online retailer.
The Last Month's CDx3 Investor Results article uses three charts to illustrate how the Federal Reserve's low-to-no interest rate policy benefited preferred stock investors during 2011, but decimated savers and punished common stock investors by extending the "Lost Decade" for a twelfth year. (jump to article)
The Special Announcement article explains how three criteria, when applied to the 1,000+ preferred stocks trading on U.S. stock exchanges, allow you to identify the highest quality issues. The table in this article takes the analysis a step further by itemizing 17 of these high quality issues that can be purchased today for a market price that is less than $25 (par). Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Fourth Edition, and am making it available to brokers, financial planners and investment groups for free. (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 - "What is the lowest preferred stock dividend rate that I can buy and still have some price protection?" (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)
Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Fed Policy Delivers Stable Prices And 7.3% Preferred Dividend Yield
Savers Coming Up Empty On Same Policy
The Federal Reserve's low-to-no interest rate policy has pushed preferred stock investors to the top of the pile for yet another year. For high quality preferred stock shares purchased throughout 2011, preferred stock investors earned about 7.3% at what many would consider to be very low risk. Very few others are making that claim.
Here are the results for high quality preferred stocks, savers (those investing in bank Certificates of Deposit) and common stock investors (as reflected by the S&P 500 common stock index) for 2011.
High Quality Preferred Stock Performance, 2011
Thanks to the Fed's low-to-no interest rate policy, which the Fed has committed to for at least another couple of years, market prices for high quality preferred stocks remained stable throughout the year as did their dividend yields.
As illustrated by Figure 1, the average annual dividend yield from high quality preferred stocks changed very little throughout the year. These securities started 2011 providing an average annual yield of about 7.4% and closed out the year offering just over 7.3%.
High quality preferred stocks are those that meet the ten selection criteria from chapter 7 of my book, Preferred Stock Investing. For example, a "high quality" preferred stock:
(1) has an investment grade Moody's rating (as opposed to a speculative or junk grade rating);
(2) has the "cumulative" dividend requirement, meaning that if the issuing company skips a dividend payment to you they still owe you the money (their obligation to you accumulates); and
(3) is issued by a company that has a perfect track record of never having suspended a preferred stock dividend.
There are seven more criteria that ordinary preferred stocks must meet in order to be considered "high quality" as presented here.
Savers - Bank Certificates of Deposit Performance, 2011
Figure 2 plots the average annual yield provided to savers by bank Certificates of Deposit (CDs) throughout the year. Bank CD rates are closely related to the federal funds rate so the Fed's policy has pushed CD rates down accordingly. Since the Fed introduced its low-to-no interest rate policy in December 2009, savers have really taken it on the chin.
The average annual yield from bank CDs began the year at 1.53% (24-month certificate) and steadily dropped to finish the year returning 1.19% to account holders, a painful reduction from where they started. Savers who had purchased a CD several years ago that matured during 2011 received a real shock. Nest egg dollars that were earning three or four percent are suddenly going to be generating, at most, half the income that they use to.
To add insult to injury, annual inflation (as measured by the Consumer Price Index) for 2011 is going to come in at about 3.2% (source: inflationdata.com). That means that inflation during the year ate any returns earned by savers by more than twice over.
While the Fed's low-to-no interest rate policy has delivered stable prices and 7.3% returns to those investing in high quality preferred stocks, savers have been decimated.
Common Stock Investors—2011 Performance
As dismal as the 2011 results are for savers, it is not clear that common stock investors did much better once you consider the risk that they are taking.
As illustrated by Figure 3, the S&P 500 common stock index started the year at 1,257.64. This index of common stock performance ended 2011 at 1,257.60 returning an average appreciation of zero to common stock investors (no preferred stocks are included in this index).
The average annual dividend paid by these common stocks was about 2%. That means that after taking the risk that is inherent with common stock investing, common stock investors did about the same as those who purchased a bank CD at the beginning of 2011.
During the first half of the 20th century the Industrial Age provided the big value driver for American business. And during the second half, it was the Information Age. With the exception of 2003 and 2009, the lack of such a value driver for the 21st century has left value seeking common stock investors empty handed.
The Lost Decade for common stock investors (2000+) just completed its 12th year.
As they have for several years now, the highest quality preferred stocks generated several times the return as that earned by savers or common stock investors throughout 2011.
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 new Fourth Edition is 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 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 High Quality Preferred Stock List
17 High Quality Preferreds Available For Less Than $25 Per Share, 7.03% Average Yield
There are about 1,000 preferred stocks trading on U.S. stock exchanges. Of these, there are 17 specific issues that are of particular interest this month. Not only are these the highest quality preferred stocks available but they are providing an average annual dividend yield of 7.03% right now.
If that isn't enough, what makes these particular preferred stocks stand out this month is that they are selling for a market price that is below their $25 "par value." Buying your shares for less than par adds a layer of principal protection to your investment. In the event that the issuing company retires ("calls") the shares, shareholders will receive the par value ($25 per share) in cash from the company. By purchasing your shares for less than the par value ($25), you position yourself for a nice capital gain to pile on top of the great dividends that these high quality preferreds pay you in the meantime.
To protect the value of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service), trading symbols are obscured here. But here's how to find these high performers out of the 1,000+ available candidates.
Applying three simple criteria eliminates the pretenders and the risk and complexity that come with them, leaving us with just the highest quality preferred stocks:
Criteria #1 - Investment Grade: By limiting the choices to those preferred stocks with a Moody’s investment grade rating, we cut the list almost in half in one shot, down to about 600 issues. With 600 investment grade issues to pick from, most risk-averse investors would rather not fool around with “speculative grade” alternatives.
Criteria #2 – Cumulative Dividends: With common stocks, if the company decides not to pay a dividend, you’re out the money. But many preferred stocks have a “cumulative” dividend provision, meaning that if the issuing company misses a dividend payment to you, it still owes you the money downstream (its obligation to pay you accumulates). Limiting our choices to just cumulative dividend preferred stocks eliminates another 200 pretenders.
These two criteria (investment grade and cumulative dividends) are pretty easy for most risk-averse investors to warm up to. We are down to about 400 remaining candidates.
Criteria #3 – Minimum Rate of 6.5%: Historically, the highest quality preferred stocks carry annual coupon rates between 6% and 9%. Not too bad compared to the ~1.3% being paid by bank CDs. But rates go up and down over time and you want to be sure that you always have some breathing room if rates fall too far. A 6% preferred stock (i.e., the bottom of the barrel) can become harder to sell once rates start rising again and higher paying alternatives are introduced. Preferred stock investors can avoid this pitfall by simply sticking with preferreds that offer a fixed dividend rate of at least 6.5%, giving you time to sell once rates bounce off of 6% and begin heading back up. That takes us to about 150 remaining issues.
By applying all ten of the criteria from chapter 7 of my book, Preferred Stock Investing, and then focusing on just those that are available for less than $25 per share, we are left with the high quality issues that you see here. This list was generated using the Preferred Stock List(TM) software tool available to those subscribing to the CDx3 Notification Service (my preferred stock email alert and research newsletter service).
Please consider becoming a subscriber to the CDx3 Notification Service today.
Already a subscriber? The trading symbols of these 17 high quality preferred stocks are listed in a January 3 post on the CDx3 Discussion Group titled "17 Symbols."
Brokers And Investment Groups: Free 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.
What is the lowest preferred stock dividend rate that I can buy and still have some price protection?
Interest rates fluctuate over time and with them the market prices of fixed income securities such as preferred stocks. Knowing this allows savvy preferred stock investors to take advantage of increasing, stable and decreasing rate conditions.
For the past two years the Federal Reserve has had a very low interest rate policy in order to help stimulate the economy. While savers (those investing in bank Certificates of Deposit) have been decimated by this policy, preferred stock investors have enjoyed very stable dividend returns of about 7% from the highest quality issues. In August 2011 the Fed announced that it will remain committed to today's low-to-no rate environment for at least another two years and they reiterated that commitment again in December.
While there is no near-term concern about increasing rates, preferred stock investors have a number of tools available to them to protect their principal going forward.
Historically, the dividend rates offered by the highest quality preferred stocks (those that are able to meet the ten selection criteria from chapter 7 of my book, Preferred Stock Investing) range between 6% and 9% with very few exceptions.
The question this month for preferred stock investors:What is the lowest preferred stock dividend rate that I can buy and still have some price protection?
6.0% since preferred stock dividend rates rarely fall below this
(C) 7.0% since this is the long-term average dividend rate paid by high-quality preferred stocks.
The correct answer to this question is (B), 6.5%.
Many preferred stock investors own such shares purely for the regular dividend income; they are buy-and-hold investors and are generally less concerned about market price fluctuations. But for others who may need to cash out their principal, today's market price of their preferred holdings becomes more important.
While there is nothing wrong with a 6.0% dividend, when dividend rates come back up off of 6.0%, holders of 6.0% issues will often find themselves unable to sell them without a capital loss. By simply putting a floor at 6.5% preferred stock investors can avoid purchasing preferred stocks that they cannot, over time, sell in order to recover their principal.
Remember that the dividend rates being offered by new preferred stocks move up and down over time between 6% and 9%. When a new preferred stock is introduced, its opening market price is always $25 (we're talking about preferred stocks that are intended to be purchased by individual investors here, not the $1,000 per share securities that are purchased by the government or big pension funds).
As dividend rates rise above 6.0%, market prices for those 6.0% preferred stocks will tend to fall below $25 and will stay there until dividend rates come back down to 6.0% some day.
Just as preferred stock dividend rates rarely reach 9%, they rarely fall all the way to 6% either. So if you purchase a new preferred stock that pays a 6.0% dividend, you are likely to be holding onto it for quite a while. If you ever hear a disappointed preferred stock investor grumbling about having purchased shares some time ago that they can never seem to sell without a loss, ask them what the dividend rate is. The answer will be a rate less than 6.5%.
By building in a .5% cushion above the bottom historical rate, you will always be holding preferred stocks that carry a certain amount of built-in price protection. When dividend rates fall below 6.5%, holders of such issues that pay 6.5% or higher will find themselves holding preferred stocks with market values that tend to be greater than $25, affording you an opportunity to sell and regain your principal.
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.
to screen, buy and sell the highest
quality preferred stocks by
the Fourth 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 Fourth 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 Fourth 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) 2012 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.