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JUNE 2015

Issue 99


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by Doug K. Le Du


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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 6.8 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 Buyers – History Suggests that June Could Bring Higher Returns for Lower Prices


In anticipation of an increase in interest rates, market prices of high quality preferred stocks have been dropping very gradually since the end of January. While still above the $25 par value of these securities, the average market price of high quality preferred stocks has fallen by $0.40 over the last four months.


I define “high quality” here as those issues that are able to meet criteria that are commonly viewed as lowering the risk of these securities such as those that offer investment grade ratings and pay cumulative quarterly dividends.

Buyer’s market approaches

As interest rates fluctuate, your preferred stock portfolio will swing from favoring dividend income (during higher rate/lower price periods) back to favoring capital gain income (once rates fall again, pushing up the price of your shares).

It is for this reason that most preferred stock investors are long-term investors, taking advantage of the known inverse relationship between rates and prices over time.

Those trying to apply the shorter-term investing strategies of a value investor (buy low, sell high) to an income investment (preferred stocks) frequently exclude themselves from the opportunity to take advantage of longer term rate and price changes.

For most long-term income investors, a period of falling prices is therefore a time to buy new shares, rather than sell existing holdings. So, for savvy preferred stock buyers, knowing when the Fed is going to start increasing interest rates becomes important since higher rates will bring higher returns at lower market prices—a classic “buyer’s market.”

Learn from history

In recent history, the Fed has announced a policy to increase interest rates on two occasions— June 2004 and December 2013—with the announcement coming a month in advance of the actual Fed action. In both cases, for as much as twelve months prior to any actual policy implementation, pundits and economists were telling us that a rate increase was imminent.

Sound familiar?

The following two charts illustrate the movement of the average market price of high quality preferred stocks before and after the 2004 and 2013 announcements. The 2004 event was a direct 0.25 percent increase in the federal funds rate while the 2013 event was the announcement of a tapered withdrawal from the Fed’s Quantitative Easing program (widely accepted at the time to produce a rate increase).

Looking at the 2004 chart, notice how fearful sellers reached their tipping point and started selling their shares in March, three months prior to the actual June 2004 announcement.



But those sellers, probably fearing a more massive rate increase, overreacted. Elated buyers stepped in and prices actually increased once the announcement was made in June. For several months thereafter, preferred stock prices and the federal funds rate were both increasing at the same time due to the initial over-reaction by sellers.

Now look at the 2013 chart.




Once we remember how 2013 unfolded with respect to the Fed and monetary policy, it is stunning how similar the behavior of preferred stock prices was to 2004.

Throughout late-2012 and into early-2013, the pundits were at it again with forecasts of a nasty rate increase due any minute. High quality preferred stock prices remained in the high-$26 range (just like 2004) but the resolve of fearful sellers began to weaken in May. Their expectations were confirmed when several FOMC members made public comments strongly implying that the Fed was likely to announce a tapered withdrawal from their QE program at their upcoming September 17-18 meeting, solidifying a four month price drop.

As it turned out, the expected September announcement was delayed until December. The downward price trend that we had seen since May resumed right where it left off in September as fearful sellers, once again, overreacted. Elated buyers jumped back in and prices increased once the announcement was made in December (and never stopped, as it became apparent that the QE taper was not going to produce the expected increase in rates after all).

In both 2004 and again in 2013, fearful sellers started (over-) selling their shares three to four months prior to an announcement of increasing rates by the Fed.

(Sources: FOMC meeting minutes:; preferred stock data: CDx3 Notification Service database,


What’s next?

On Wednesday, May 2o, 2015 the meeting minutes from the April 28-29 FOMC meeting were released and included two changes that are of particular interest to preferred stock investors. First, the phrase “...we can continue to be patient,” was removed from the five places it appeared in the prior meeting’s minutes. Secondly, the May 20 minutes stated that the startling weakness of the U.S. economy during the first quarter of this year was “transitory,” the implication being that those who had concluded that the weakness may imply a delay in raising the federal funds rate should stop feeling that way.

But even more clarity was provided by Fed Chair Janet Yellen two days later. During a speech on Friday, May 22 Yellen specifically stated “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate.”

While no one, including Yellen, knows with certainty what unemployment and inflation will look like in the future, these statements by the Fed are as specific as they ever get, short of an actual policy announcement. Most analysts are now forecasting an increase in the federal funds rate after the FOMC’s September 16-17 or December 15-16 meeting.

Preferred stock sellers started selling their shares three to four months prior to an actual Fed announcement for the last two such occurrences. If the Fed is going to announce a rate increase this coming September, we could see the market prices of high quality preferred stocks start to drop as June payers clear their June ex-dividend dates. We’ll see just how touchy sellers are as June unfolds but it’s time for preferred stock buyers to start paying attention.










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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.

























Preferred Stock Market Research Now Available All Month Long - Free


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.

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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.