“Stock screening, dividend dates, call dates...I consider the information on the web site of high value to me for investing in preferred shares." Daniel B., CDx3 Notification Service subscriber MORE>>
|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.
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 breaks down the bumper crop of 13 new preferred stock issues that we have seen so far this year and explains a technique that preferred stock investors can use in today's very high priced market to purchase newly issued high quality preferred stocks for a market price below par (usually $25). (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 4 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 - "Why are preferred stocks considered lower risk than the same company's common 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)
Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
How To Buy High Quality Preferred Stocks For Less Than $25 Per Share
Buying Opportunities Below Par Are Available For Those Who Know Where To Look
Buying preferred stock shares for less than "par" (usually $25 per share) is important to many preferred stock investors since doing so not only adds a layer of principal protection to your investment but also positions you for a downstream capital gain should the issuing company "call" (buy back from you) your shares. In the event of a call, shareholders receive the par value in cash for each share so purchasing for a price below par becomes important.
As I am about to explain, savvy preferred stock investors can still purchase high quality preferred stock shares below par by using an often overlooked technique. A technique that has become especially important in today's market that is characterized by lots of new preferred stock issues to pick from but high market prices.
Spike In Calls Has Produced A Bubble Of Buyers
The problem we have at the moment is that preferred stock market prices took a big step up during February due to a spike in demand. Most of this increased demand is being caused by the large number of preferred stock calls that we have seen so far this year. There were seven high quality preferred stocks called just last month and four more have been announced for March (check your cash account).
The high quality preferred stocks that have now been called were widely held by risk-averse preferred stock investors so these calls have created a bubble of newly cash-rich preferred stock buyers, all looking to replace their called shares at the same time.
Market prices have been pushed up accordingly leaving relatively few high quality issues available for a market price less than par. While the table in this month's "Special Announcement" article below shows four such high quality preferred stocks (February 27, 2012 prices), this same table just over a year ago listed 30 issues available for less than par. At the moment, the market for high quality preferred stocks is very tight.
Our Opportunity: Newly Issued High Quality Preferred Stocks
But there has also been a bumper crop of newly issued preferred stocks as well. In fact, the cash being used to buy back all of these called shares so far this year has been generated entirely by the issuance of new preferred stocks from these companies.
Historically, between one and two preferred stocks are issued each month that are able to meet all ten of the "high quality" criteria described in chapter 7 of my book, Preferred Stock Investing. As Figure 1 illustrates, there have been 13 new preferred stocks issued in just the first two months of this year, four of which meet the ten criteria and offer an average dividend rate (coupon) of 6.854%.
It is with the newly issued high quality preferred stocks that our opportunity to purchase shares below par presents itself. Understanding how to do so requires an understanding of the three steps that a newly issued preferred stock takes in order to come to market. It is at step 2 of this three step process that you can purchase shares of a new high quality preferred stock for a market price that is below par ($25).
Three Steps To Market
In almost all cases, when a company decides to introduce a new preferred stock to the marketplace they work with a group of investment banks that play the role of underwriter.
Step 1 - Underwriters Buy New Shares From Company: The underwriters pool their money (often hundreds of millions of dollars) and buy the new shares from the issuing company. A trading application is filed with the New York Stock Exchange for a new trading symbol. The underwriter's commission is collected from the issuing company in the form of a discounted price for the new shares. This commission is usually around $0.75 per share and is published in the prospectus of the new preferred stock (Duke Realty paid $0.7875 in this example). So the underwriters pay the issuing company about $24.25 per share for the new shares.
Step 2 - Dealer/Brokers Buy New Shares From Underwriters: Now out hundreds of millions of dollars, the underwriters are anxious to sell the new shares and they are not at all interested in waiting around until someone at the NYSE assigns a new trading symbol (which usually takes about 10 days). Rather than wait, the underwriters sell the new shares to dealer/brokers for a price of about $24.50. To facilitate these pre-market trades, the parties use the less formal "Over-The-Counter" (OTC) stock exchange using a temporary OTC trading symbol. The underwriters make a very quick $0.25 per share with very little risk and the dealer/brokers now own the shares. For all the same reasons, the dealer/brokers are very anxious to sell the shares and they really do not care who they sell them to, as long as they can do so quickly.
It is at this point where an individual preferred stock investor, armed with an online trading account, can usually buy shares of a newly issued preferred stock for a discounted price below par. Most online trading accounts allow you to use the same temporary OTC trading symbol to place a buy order for a newly issued preferred stock while it is trading on the OTC pre-market stock exchange.
Since we have a motivated seller (the dealer/broker) who just paid about $24.50 per share, buy orders between $24.50 and $25.00 are almost always filled.
Step 3 - NYSE Approves Trading Application: Once the NYSE approves the trading application, a permanent trading symbol is assigned and your broker automatically transfers any shares that you purchased to the new NYSE symbol. Once the new shares hit the NYSE the market price tends to trend above $25 for at least the near-term since the increase in visibility usually produces an increase in demand.
In today's very tight market for high quality issues, buyers who purchase shares of newly issued preferred stocks while they are trading on the Over-The-Counter stock exchange will frequently be able to do so for a price below par, effectively putting a piece of the underwriter's original $0.75 commission into your own pocket.
Subscribers to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive an email notification for every new high quality preferred stock as it progresses through these three steps to market.
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
4 High Quality Preferreds Available For Less Than $25 Per Share, 6.63% Average Yield
There are about 1,000 preferred stocks trading on U.S. stock exchanges. Of these, there are 4 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 6.63% 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.
The marketplace for high quality preferred stocks is seeing a high number of new issues and also a high number of calls so far this year. When your shares are called by the issuing company, preferred stock investors are often looking for that next purchase in order to keep their cash working for them.
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 in one mouse click 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 high quality preferred stocks are listed on page 6 of the March 2012 issue of the subscriber's newsletter, CDx3 Research Notes. Or click on the CDx3 Bargain Table HotList on the CDx3 Notification Service website.
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.
Why are preferred stocks considered lower risk than the same company's common stock?
As pointed out in the beginning of my book, Preferred Stock Investing, all investment strategies have two assumptions in common - (1) that the entity being invested in remains a going concern and (2) investing is no place for next week's grocery money.
Preferred stock investing is no exception. Our returns are paid to us by the issuing company and, since market prices go up and down repeatedly over time, you do not want to be in a position of being forced to sell when prices are lower than when you made your original purchase.
And investment risk is often very difficult to quantify. That is, it can vary from one investor to the next. What is acceptable risk to one investor may be unacceptable to another. But for some very specific reasons, the same company's preferred stocks generally carry less investment risk than their common stock.
The question this month for preferred stock investors:Why are preferred stocks considered lower risk than the same company's common stock?
Preferred stockholders get paid their dividends before common
(C) Preferred dividend payments are less tied to quarterly profits
(D) Common stocks have no par price below which principal is more protected
(E) All of the above
The correct answer to this question is (E), all of the above. Let's take them one at a time.
Preferred stockholders get paid their dividends before common stockholders: This is why they are called "preferred" stock; preferred stock shareholders have preferred status over common stock shareholders. A company cannot pay their common stock shareholders one dime in dividends until all preferred stock dividends have been paid out.
Prices are less volatile since the dividend is known in advance: Market price fluctuations are caused by speculation; the more unknowns, the more speculation. Since the dividend paid on a company's common stock (if any) can vary every quarter, there is substantial speculation at all times. Preferred dividends are generally of a fixed amount and are known in advance so preferred stock market prices are generally less volatile.
Preferred dividend payments are less tied to quarterly profits: Common stock dividends are a distribution of quarterly profits, if any, to shareholders. Preferred dividend payments are generally reserved in advance since the amount is known and are therefore more closely tied to the company's cash flow than to quarterly profits.
Common stocks have no par price below which principal is more protected: Preferred stocks can be "retired" by the issuing company. To do so, the company must buy the preferred stock shares back from shareholders at a pre-declared price called the "par value" (usually $25 per share). Investors can therefore reduce the risk of principal loss by purchasing their shares for a market price less than the par value. Common stocks have no such provision (and no such "built-in buyer").
While my book, Preferred Stock Investing, describes a variety of reasons why many investors find preferred stock investing more attractive than common stocks, these four risk reduction aspects of preferred stocks are particularly compelling. Add to that their long-term average annual dividend yield of about 7% (compared to 4% for common stocks over the last century, closer to 2% since 1990) and, for many investors, the case for preferred stocks becomes hard to ignore.
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.