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JULY 2015

Issue 100


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by Doug K. Le Du


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See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.








Top 10 Investment Grade, Cumulative Preferreds Available Under $25



The ten highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.7 percent Yield-To-Call in today's preferred stock marketplace.

As rates move up and down over time, prices tend to move in the opposite direction, moving down and up, respectively. This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.

Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find these gems. Of the twenty parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


Figure 2 shows the results when this search is applied to our Preferred Stock List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, that you received at the end of last month for symbols.



There were a total of 894 preferred stocks and ETDs trading on U.S. stock exchanges as last month came to a close. Of these 894, these are the top ten highest quality issues that are trading below their $25 par value. This list is sorted by dividend rate (coupon) with the highest payers listed first.

The securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining securities listed are preferred stocks. All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.

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Preferred Stock Market Q2/2015: Investment Grade Preferred Stocks Available Below $25


It’s time for preferred stock buyers to start paying attention. In anticipation of a September 2015 Fed interest rate hike, the average market price of preferred stock shares fell to $25.03 at the end of June, a drop of $0.62 per share over the last three months. With lower prices come more sub-$25 candidates paying higher returns – the hallmark of a classic buyer’s market.

With the second quarter of 2015 behind us, the number of investment grade preferred stocks selling for a market price below $25 is now at 76, up from 39 candidates at the end of Q1.

The Preferred Stock Market, Q2/2015

The similarities between the preferred stock market of 2013 and that of 2015 are hard to miss. In both cases, preferred stock prices started the year in the high-$26 range with pundits forecasting a change in Fed policy to begin increasing the federal funds rate. Also in both cases, those forecasts were largely ignored by preferred stock investors until the summer rolled around and Fed officials started hinting that their September meeting would bring the long-awaited change. With those statements in 2013, preferred stock prices started to fall, dropping below $26 in June of that year, just like last month, as shares cleared their quarterly ex-dividend dates.

This Preferred Stock Market Snapshot™ chart depicts the preferred stock marketplace at the end of Q2/2015 using two characteristics that are usually high on the list of considerations for risk-averse preferred stock investors - current market price (above and below these securities' $25 par value) and investment risk (as reflected by investment grade versus speculative grade Moody's ratings).



Each diamond represents a preferred stock. The sweet spot of the preferred stock marketplace is depicted in the green lower-left quadrant - investment grade preferreds selling for a market price below their $25 par value.

While there are currently 894 preferred stocks trading on U.S. stock exchanges, 308 meet the criteria listed under the chart. The arrow in the table below the chart points to the migration that we have seen over the last three months. As prices have fallen since the end of Q1, the percentage of the market occupied by investment grade securities that are priced below $25 has increased to 25 percent, up substantially from 12 percent.

(Source: CDx3 Notification Service database,


Maximum Yield Candidates

The purple diamonds on the above chart identify the four preferred stocks that are offering the maximum current yield from each quadrant (not to be taken as recommendations): AGO-E, HSEA, ALLY-B and GDP-D.



Note that for comparison purposes, I have selected Current Yield (CY) for the Yield column rather than Yield-To-Call (YTC) or Effective Annual Return (EAR) since three of these four securities have exceeded their call dates (YTC and EAR are not able to be calculated in those cases).

Founded in 2003, Assured Guaranty Ltd. (AGO) is a $3.6 billion (market cap) Bermuda-based insurer and reinsurer of a wide variety of debt obligations. The company currently has three income securities trading – AGO-B, AGO-E and AGO-F (originally issued by Financial Security Assurance Holdings, acquired by AGO in 2009) - all of which have been redeemable for several years. This security offers a 6.250 percent annual dividend (coupon), paying $0.39 per share each quarter. AGO-E, presented here in green font, is an Exchange-Traded Debt Security (ETDs). ETDs are very similar to preferred stocks and are often labeled as such, but they are actually bonds that trade on the stock exchange (rather than the bond market). ETDs offer cumulative dividends and are recorded on the company’s books as debt rather than equity. As bonds, ETDs are generally seen as having less investment risk than the same company’s preferred stocks (see “Preferred Stock Investors: 'Exchange Traded Debt Securities' Offer Same Reward, Lower Risk”, March 20, 2012). Of the 76 investment grade securities that are currently trading below their $25 par values, AGO-E is offering the highest current yield at 6.48 percent, closing at $24.13 on June 29.

HSEA is a trust preferred stock (TRUPS) introduced by Britain’s largest bank, HSBC Holdings PLC (HSBC), at 8.125 percent in April 2008 and has been callable since April 15, 2013. Note that HSEA offers Qualified Dividend Income (QDI) to individual investors (but not to corporate investors since HSBC is a foreign company). As a TRUPS, HSEA provides cumulative dividends but today’s buyers should be sure to read the prospectus of this security since the issuer, at their option and at any time, is able to convert these cumulative HSEA shares into non-cumulative “dollar preference shares.” Today’s buyers may also have to find a way to overlook the $1.92 billion fine that HSBC was required to pay in late-2012 for providing illegal banking services to the world’s drug cartels (see “Bleak day for British banking as Libor arrests follow record fine for HSBC”, The Guardian, December 11, 2012) and the bank’s role in the LIBOR manipulation scandal more recently, the settlement to which the bank may be reneging on (see “U.S. May Revoke Settlement Agreements in Currency-Rigging Probes”, Bloomberg, March 17, 2015). Today’s $26.08 market price exposes buyers to a $1.08 capital loss in the event of a redemption of HSEA shares.

ALLY-B is a traditional preferred stock introduced in March 2011 at 8.50 percent by Ally Financial (ALLY). To help avoid some confusion, even though the trading symbol is denoted as “-B” and is the only preferred stock currently offered by the company, the prospectus description refers to this security as “Series A,” a rare disconnect between the symbol assigned by the NYSE and the description provided by the company. Ally was originally founded in 1919 as GMAC, specializing in financial products to car dealers and buyers. At Caa1, ALLY-B is well into Moody’s speculative grade rating scale which explains the 8.02 percent current yield for this security. Of the 41 million shares issued with ALLY-B, the company announced a tender offer for 13 million shares on May 20, 2015. Trading at $26.49, today’s buyers are exposed to a $1.49 per share capital loss in the event of a redemption.

GDP-D is a traditional preferred stock offering cumulative dividends and was introduced in August 2013 by Goodrich Petroleum (GDP) at 9.75 percent. Its Caa2 rating is so low that this security is barely hanging onto the low end of the Moody’s scale. The early-October, 2014 plunge in global oil prices showed up quickly in the market prices for energy-related securities, especially upstream producers such as Goodrich. The company began selling assets last December in order to meet its cash obligations (see “Goodrich shares slump after company says to explore sale of shale asset”). GDP-D started last October at $25.55 per share but dropped to $6.50 on June 29. The more risk-tolerant among us might consider GDP-D as a capital gain opportunity, assuming that the company is able to survive (or be acquired). Note that, like HSEA, GDP-D is designated as paying Qualified Dividend Income (QDI).

These four securities from four vastly different companies are offering the maximum current yields in the four key quadrants depicted by the Preferred Stock Market Snapshot™ chart.

(Source: SEC prospectus filings for AGO-E | HSEA | ALLY-B | GDP-D).


What’s next?

Falling prices is great news for preferred stock buyers, but not so much for those who have treated an income investment using value investing strategies. For the last several years, as prices have been artificially propped up by the Fed’s monetary policy, I have issued frequent reminders to use the wholesale Over-The-Counter stock exchange for new purchases (see “Preferred Stock Buyers: Time To Change Tactics For Sub-$25 Purchases”, July 14, 2014). Doing so has allowed preferred stock buyers to purchase newly introduced preferred stock shares for sub-$25 wholesale prices; these are the same shares that those who waited to use the retail NYSE paid a much higher price for.

But the advantage of using the OTC will erode as retail prices continue to fall and sub-$25 shares become more widely available; the difference between wholesale OTC prices and retail NYSE prices will diminish substantially.

As history suggested, June 2015 was the month that preferred stock sellers reached their tipping point and started selling their shares in anticipation of a September hike in the federal funds rate (see “Preferred Stock Buyers - History Suggests That June Could Bring Higher Returns For Lower Prices”, June 1, 2015). The average market price of the highest quality preferred stocks (cumulative dividends, investment grade ratings, call-protected, etc.) fell $0.33 during June alone, delivering the highest returns for such securities that we have seen since last year to today’s buyers.










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Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with 80 reviews posted at Amazon.

The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are currently facing.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













Recent Preferred Stock Articles by Doug K. Le Du


Here is a list of some of my recent syndicated articles. To view an article, just click on the headline.

























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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.