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For New Readers...
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.
To be sure that you continue to receive the CDx3 Newsletter each month, please remember to add the following email address to your email address book safe sender list:
What Is A "CDx3 Preferred Stock?"
CDx3 Preferred Stocks are regular preferred stocks that are able to meet the ten selection criteria described in chapter 7 of my book, Preferred Stock Investing.
Applying the CDx3 Selection Criteria eliminates the pretenders, leaving just the highest quality issues.
For example, here are three of the ten CDx3 Selection Criteria:
1. be issued by a company with a perfect record of never having suspended a dividend on a preferred stock;
2. have the "cumulative" dividend requirement, which means that in the unlikely event that the issuing company misses a dividend payment to you, they have to make it up to you later; they still owe you the money; and
3. be rated "investment grade" by Moody's Investors Service.
Having specific and consistently applied selection criteria takes the emotion out of your investing decisions and leaves you with the highest quality preferred stocks - "CDx3 Preferred Stocks."
This month's High Quality Preferred Stocks article describes how preferred stock investors can use today's high market prices to increase their dividend income while producing a net capital gain at the same time. The article uses real preferred stocks to show you how to turn what would have been $3.28 per share in dividend income into $5.36 per share on the same principal over the same period. (jump to article)
The Preferred Stock News article explains why preferred stock investors should be wary of investing in bank-issued trust preferred stocks (TRUPS) prior to Thursday, September 6, 2012. Those considering doing so, thinking that they are likely to earn a capital gain, are more likely to see a very different result. (jump to article)
The Special Announcement article explains how you can now have continuing preferred stock research delivered to you for free. 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. (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.
How To Be a Preferred Stock Buyer In Today's High Priced Market
Use Today's High Prices to Pile On Income Without a Net Capital Loss
Just because market prices for high quality preferred stocks are at a record high does not mean that buyers have to sit on the sidelines. During "buyer's market" conditions (lower prices), being a preferred stock investor is easy - buy shares below par, cash the dividend checks and wait for the issuing company to redeem your shares for a capital gain.
During "seller's market" conditions, however, there are no shares priced below par, so using the same technique is not going to be very productive.
There are three techniques that preferred stock investors can use during a seller's market to take advantage of the high prices to generate additional income - the Double-Dip, Upgrading and Piling-On.
The July issue of the CDx3 Newsletter described the Double-Dip technique (which is used when a preferred stock is called by its issuing company). And last month's issue discussed Upgrading (allows you to sell a low paying preferred stock and use the proceeds to buy another such that your dividend income goes up and you realize a net capital gain with cash left over when you're done). This month I'll describing the "Piling-On" technique.
The data presented here is from actual preferred stocks using market prices from August 29, 2012.
Please note that in order to protect the values of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) the actual trading symbols are obscured here. If you are already a subscriber to the CDx3 Notification Service please see pages 2 and 3 of the September issue of the subscriber's newsletter, CDx3 Research Notes, for the trading symbols used here.
Piling-On is a two-step process. The end result of Piling-On is a net capital gain and an increase in your dividend income. In the example presented here, you will realize a net capital gain of $1.86 per share and your quarterly dividend income will go up by $0.03 per share on the same principal over the same period.
Step 1: Sell Candidate
In today's high-priced market, preferred stocks that you purchased a year or so ago are showing a large, but unrealized, capital gain. The Piling-On technique is going to put that gain to work for you.
Look over your preferred stock portfolio and find the issue showing the largest gain. In the example presented in Figure 1 we will use PFD-A, a 6.5% preferred stock currently selling for $28.55 per share (this example assumes that you originally purchased your PFD-A shares when it was first issued for $25.00 per share).
At 6.5%, PFD-A pays a quarterly dividend of $0.41 per share. By selling PFD-A today you pocket a capital gain of $3.55 per share. That's over eight quarter's worth of dividend income (8.7 quarters) that you receive now, all at once. If you do not sell, PFD-A will pay you a total of $3.28 per share over the same eight quarters. By selling today at $28.55, you are paid for the next eight quarters in advance.
Step 2: Buy Candidate
The downside of purchasing preferred stock shares for a market price that exceeds the security’s par value ($25) is that you will be exposed to a capital loss in the event that the issuing company redeems (calls) your shares downstream. In the event of a call, shareholders will receive $25.00 from the issuing company so buying above $25 is usually risky.
But what if someone else reimburses you, in advance, for that potential future loss? The Piling-On technique allows you to buy above par but still realize a net capital gain.
Remember, you have already been paid for the next eight quarters on your $25 principal just as if you had held onto your PFD-A shares and not sold. The buy side of the Piling-On technique allows you to get paid a second time on the same principal for the same period, boosting your income substantially.
To make Piling-On work, your buy candidate should expose you to a smaller loss than the $3.55 per share gain that you have already pocketed. Also, look for a candidate that is call protected—the further out into the future the call date is the better.
Our Preferred Stock List(tm) database offered to CDx3 Notification Service subscribers allows you to list all preferred stocks trading on U.S. stock exchanges and sort them by call date and market price (see sample screen here).
Figure 2 shows a partial list of the highest quality preferred stocks currently trading on U.S. stock exchanges as generated by our Preferred Stock List(tm) database. This example of Piling-On will use the first issue listed - PFD-B. PFD-B pays a 7.0% annual dividend ($0.44 per quarter) and is available for purchase at $26.69 per share. And notice that PFD-B is call protected until July 1, 2017.
This example assumes that you sell your PFD-B shares at the end of the eight month reinvestment period for $25 per share, realizing a capital loss of $1.69 per share ($26.69 minus $25).
But remember, you have already been reimbursed for that potential downstream capital loss since you realized a capital gain when you sold your sell candidate shares at step 1. It is the fact that we are in a strong seller's market that allows this Piling-On technique to work accordingly.
Result of "Piling-On" - Income Increases by $2.08 per Share on Same Principal
Figure 3 presents the result of this Piling-On example. Remember, if you had just held onto your PFD-A shares for the next eight quarters you would have earned a total income of $3.28 per share (all of it as dividend income).
Using your capital gain from the sale of PFD-A to reimburse your capital loss when buying PFD-B generates a net capital gain of $1.86 per share ($3.55 minus $1.69). Plus, rather than earning $3.28 per share from PFD-A dividends, the PFD-B shares that you now hold provide $3.50 per share over the same eight quarters.
The Piling-On technique delivers a total income of $5.36 per share on the same principal over the same period. That's a $2.08 per share increase in your income. All you need is a list of high quality preferred stocks and their market prices that is able to be sorted by call date.
Please consider becoming a subscriber to the CDx3 Notification Service today.
Already a subscriber? The trading symbols for this example are provided on pages 2 and 3 of the September 2012 issue of the subscriber's newsletter, CDx3 Research Notes.
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 CDx3 Preferred Stock database and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.
Invest in the best. Subscribe to the CDx3 Notification Service today.
Potential Capital Gain Opportunity Next Thursday with Trust Preferred Stocks?
Premature Call Window Closes on Thursday, September 6, 2012
Some investors may be thinking that there is a quick capital gain opportunity coming next Thursday when the currently open "premature call window" for bank trust preferred stocks (TRUPS) expires.
Preferred stocks that are "call-protected" tend to command a higher market price than otherwise similar preferred stocks that do not enjoy such protection (those that have exceeded their published call dates). Looking at the current market prices of traditional preferreds (non-TRUPS), we can see that investors are paying an average $1.59 per share premium for call-protected issues.
Since a multitude of TRUPS that are currently redeemable will become call-protected next Thursday, it is tempting to think that the market prices of such issues are likely to increase accordingly, delivering a quick capital gain to today's buyers.
But preferred stock investors thinking along these lines will probably be disappointed. In fact, as compelling as this chart may appear, buying TRUPS shares today will be much more likely to produce a capital loss than any near-term gain. Here's why.
Call-Protection Returns Thursday, September 6, 2012
As explained in the Seeking Alpha article titled "Preferred Stock Investors About To Be Cash-Rich Thanks To New Fed Action," the Federal Reserve announced on June 7, 2012 that they are considering changes to how bank reserves ("Tier 1 Capital") should be calculated in order to comply with new international guidelines (Basel III). That announcement was deemed to be a "capital treatment event." Consequently, all bank-issued TRUPS, even those that had yet to reach their published call dates, became callable during the subsequent 90 days following June 7.
TRUPS that were call-protected prior to June 7, 2012 lost that protection on that date. The price premium that they were commanding in the marketplace disappeared accordingly, now at $0.62.
The current 90 day window during which premature calls are allowed expires on Thursday, September 6, 2012. On that day, bank-issued TRUPS that have yet to reach their published call dates return to being call-protected.
Two More Triggers to Pull
A capital treatment event occurs not just when a change is made to the formula for Tier 1 Capital, but also when it is announced that such a change is merely being considered. That's what happened when the Fed made their June 7 announcement. They did not announce a change to the Tier 1 Capital formula. Rather, the Fed announced that they were considering making a change needed to comply with new international reserve guidelines.
The actual change needed to comply with Basel III guidelines is still being deliberated by banking officials and has yet to be announced.
Once finalized, which can happen at any time, the Fed will announce an actual change and the implementation date for that change. The announcement of an actual change to the Tier 1 Capital requirements needed to comply with the new Basel III guidelines will, for the second time, open the 90 day premature call window for call-protected bank TRUPS.
Any such announcement would presumably also include the date that the change is to become effective. On that date, when the change is actually implemented, the 90 day premature call window will open for the third time, rendering all call-protected TRUPS redeemable for the subsequent 90 days.
The Fed could (and very well may) do all involved a huge service and eliminate a great deal of market confusion if they announce the agreed upon change for Basel III compliance on October 3, 2012 for implementation 91 days later on January 1, 2013. Doing so would sync up the implementation of our domestic standards, per the Dodd-Frank legislation which are scheduled to become effective January 1, 2013, with the implementation of our international standards, per Basel III.
Because the Fed has two capital treatment triggers remaining regarding Basel III compliance, and can pull those triggers at any time, it is unlikely that the market prices of call-protected TRUPS will gain the premium that other call-protected preferred stocks currently enjoy as illustrated in the first chart above.
It is not possible to know with certainty what market prices will do in the future. But investors considering purchasing TRUPS shares prior to Thursday, September 6, thinking that a capital gain opportunity is in store for shares that will return to being call-protected, should also consider that the Fed will open the premature call window for two more 90 day periods, rendering such shares redeemable on both occasions, regardless of their published call dates.
When the Fed makes their next Basel III compliance announcement, which they have reason to make on or before October 3, 2012, the market price of call-protected TRUPS shares will almost certainly move immediately toward $25, exposing many TRUPS buyers hoping for a quick capital gain to a very different result.
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.
Test Your Knowledge With These Preferred Stock Facts!
There's a lot to like about preferred stocks. And many aspects of selecting, buying and selling the highest quality issues are misunderstood. Here are a few frequently asked questions that illustrate some of the more subtle points of preferred stock investing.
Clicking on any of the below questions will open a new window on your screen. Each question is presented with multiple-choice answers. Test your knowledge by submitting your best guess and I will automatically email you my analysis with the correct answer (and no spam, ever).
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.
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.