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"I also
subscribe to the Motley Fool Income Investor and the Morningstar
Dividend Investor...but the CDx3 Notification Service is my
favorite..."
- Tom O.
As always, welcome to all of the
new CDx3 Newsletter subscribers who signed up during
April. 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:
CDx3NotificationService@us.emaildirect.com.
April was a wild month for CDx3 Investors.
Just as the month was wrapping up, two new CDx3
Preferred Stocks were issued that pay the
highest dividends rates that we have seen since
December 2002. The Last
Month's CDx3 Investor Results article below provides a chart
that shows how these two late-April offerings
stack up against the other CDx3 Preferred Stocks
that have been offered so far this year.
This month's Special
Announcement article summarizes my meeting with the SIR
group in Santa Rosa, California where I was pleased to meet
several readers of Preferred Stock Investing and
subscribers to the
CDx3 Notification Service. The Special
Announcement article provides a link that you can use to
download educational meeting materials for your investment group
- no charge. Tired of reviewing the same tired reports at
your group meeting? Why not learn something about preferred
stock investing?
Ever read a stock prospectus?
You don't have to read very far before doing almost anything
else starts to sound pretty good. They're a tough read, no
doubt about it. In this month's CDx3 Company Spotlight
article I would like you to meet Southwest Gas Company. I
will use one of their CDx3 Preferred Stocks to show you, click
by click, how to quickly and easily find some of the key
prospectus language that CDx3 Investors tend to be most
interested in.
This month's CDx3 Question Of The
Month article continues a theme from the last few issues of
the CDx3 Newsletter regarding the dividends paid to you
by CDx3 Preferred Stocks. This month, I answer a question
from Peggy G. that shows you how you can build a CDx3 Portfolio
without having to continually invest new money.
For our new readers, there is a free calculator available
to you that allows you to correctly calculate the effective annual return of
preferred stock investments. The Free Special Offer
article below provides you with a download link. Keep an eye on this monthly CDx3 Newsletter
for announcements of future promotions of CDx3 products and
services.
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Two New CDx3
Preferred Stocks Pay Highest Dividend Rate Since 2002
"Credit Crisis" Pushes CDx3
Investor Dividend Income To New Record
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 Crisis? What
crisis? Just when it seemed like we had seen the
high water mark for the annual dividend rate
offered by new CDx3 Preferred Stocks, two new
issues were introduced in late April that pay a
stunning 8.875%. The average dividend rate
being paid by newly issued CDx3 Preferred Stocks
has now reached a record high of 8.250%.
There has only
been one other CDx3 Preferred Stock, issued on
December 6, 2002, that pays dividend income this
high. While wondering if we would ever see
this kind of rate again, two new issues appeared
before CDx3 Investors within two days of each
other, the first on April 28 then another on
April 30, 2008.
Thanks to banks: Cash-strapped
banks have dominated the recent market for CDx3
Preferred Stocks, bidding up the dividend rates
offered on new issues in order to attract
investor cash. CDx3 Preferred Stocks were
paying annual dividends around 6.75% when this
buyer's market started last June; the average
annual dividend rate being paid by new CDx3
Preferred Stocks reached 8.25% in April.
This at a time when the average annual interest
rate being paid by bank Certificates of Deposit
(CDs) is 3.67% (24-months, $10k; source:
bankrate.com).
The above chart
shows the annual dividend rates paid by the
eight CDx3 Preferred Stocks that have been
issued so far this year. You can see the
two April issues that I'm talking about, each
paying a stunning 8.875% annual dividend.
Glass slipper test:
Only about ten
percent of ordinary preferred stocks qualify to
be "CDx3 Preferred Stocks." These gems
will filter through the ten CDx3 Selection
Criteria at a rate of about 1-2 per month.
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Here
are just three of the ten CDx3 Selection
Criteria that regular preferred stocks have to
meet in order to be considered CDx3 Preferred
Stocks; CDx3 Preferred Stocks must:
1. be rated
"investment grade" by Moodys;
2. be issued by a
company with a perfect record of never having
suspended a dividend on a preferred stock; and
3. have
the "cumulative" dividend requirement,
which means that in the unlikely event that the
issuing company misses a dividend payment to you
(which I have never seen happen with a CDx3
Preferred Stock), they have to make it up to you
later; they still owe you the money.
 When
CDx3 Preferred Stocks are introduced, you can
generally buy them for about $25 per share.
CDx3 Investors sold the last CDx3
Preferred Stock with a 8.875% dividend rate for
$27.53 about six months after purchase, earning an effective
annual return of 28.95% (PSI, page 128).
What are the trading
symbols? Preferred Stock
Investing teaches readers how to identify
and purchase new CDx3 Preferred Stocks when they
are introduced and Chapter 14 of the book
provides the web sites and other resources that
you need to be a successful CDx3 Investor
completely on your own. If you would
rather not take the time, subscribers to the
CDx3 Notification Service receive a CDx3 Buyer's
Notification email message whenever there is a
buying opportunity - complete with trading
symbols; we do the work
for you.
CDx3 Investors use
CDx3 Preferred Stocks to earn both above-average
dividend income and capital gain income
when it comes time to sell; exactly how and when
one does so varies depending upon market
conditions (as explained in Preferred Stock
Investing). This is the heart of the
CDx3 Income Engine - use the highest quality
preferred stocks to generate great fixed
dividend income until a selling
opportunity presents itself.
If you are
interested in learning how to screen, buy and
sell the highest quality preferred stocks, please
consider purchasing
Preferred Stock Investing
and/or subscribing to the
CDx3 Notification
Service. This is a great time to have the CDx3 Income Engine
working for you. |
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SIR Group Learns About Preferred Stock Investing
Saint Patrick's Day Meeting
Focuses On Forces That Move CDx3 Preferred Stock Market
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On March 21, 2008, the Friday following Saint Patrick's Day
weekend, I had the
pleasure of addressing the Sons In Retirement group in
Santa Rosa, California. While it was hard to step away
from the corned beef and cabbage, eventually it was time
to share some thoughts about investing in preferred
stocks.
Doug K. Le Du, author of Preferred Stock
Investing, speaks with the Sons In Retirement
group March 21, 2008. (photo: Gary Rosing)
In a group this size, all
levels of expertise will be represented so the specific
topics and questions ranged from why preferred stocks
have more potential than bonds to how Moody's ratings
work, cash flow investing, risk management and the
current "credit crisis." It was great to
speak directly with several Preferred Stock Investing
readers and subscribers to the
CDx3 Notification Service
who were in the audience that day.
Another major point of
interest was the Three Rules of Market Price
Predictability from Chapter 5 of Preferred Stock
Investing. These are the three primary forces within
the market for CDx3 Preferred Stocks that tend to affect
market prices in a fairly predictable manner. |
As you might guess,
knowing something about the direction of market prices,
and the reasons why they behave the way that they tend
to, is of key interest to those considering an
investment.
Groups are always
surprised to learn of the wide variety of preferred
stocks that are available and, many times, express some
frustration that their brokers rarely make them aware of
the available alternatives.
With the dividend
rates being offered by new CDx3 Preferred Stocks
now exceeding 8%, many fixed-income investors are finding
renewed interest in the highest quality
preferred stocks.
Free Investment Group Materials: If you are a member of an
investment group, there are free preferred stock
investing meeting materials available for you to
download from the PreferredStockInvesting.com web site.
Why not learn something new at your next group meeting?
The meeting materials are
available in three formats: (1) color handout, (2) black
and white handout and (3) color slide show presentation. All
three can be downloaded and viewed on a Mac or Windows
computer and are available to you for free by
clicking
here.
Thanks again to the
members of the SIR group in Santa Rosa, California for
your hospitality.
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Who Are
These Companies That Issue CDx3 Preferred
Stocks?
Southwest Gas
Corporation (NYSE: SWX)
While cash-strapped banks have
dominated recent offerings, CDx3
Preferred Stocks are issued by a
wide variety of companies from a
number of diverse industries.
One such company is Southwest
Gas Corporation, a $1.3 billion
utility headquartered in Las
Vegas, Nevada.
Founded in 1931, Southwest Gas
distributes natural gas to
almost two million residential,
commercial and industrial
customers throughout Arizona,
Nevada and California.
Recently upgraded by Citigroup
from Hold to Buy, Southwest Gas
has managed to remain profitable
during a turbulent time for its
residential customer base.
The
Series B CDx3 Preferred Stock
from Southwest Gas Corporation (SWX-B:
QUOTE)
was issued on August 21, 2003
and pays a 7.7% annual dividend.
After SWX-B was issued, it would
be another four years, almost to
the day, before another CDx3
Preferred Stock that paid this
high of a dividend would come
along. SWX-B was the high
water market for four full years
until last year's credit crisis
pushed banks to take over the
top spot (now at 8.875%).
What
were they thinking?
When Southwest Gas issued SWX-B
in August 2003, the "going
dividend rate" being offered by
new CDx3 Preferred Stocks at the
time was about 6.75%. Why
would Southwest Gas issue SWX-B
at 7.7%, almost a full
percentage point higher than the
going rate?
 This
is where knowing how to quickly
find and read the
prospectus of a CDx3 Preferred
Stock comes in very handy.
Using the actual prospectus on
file with the U.S. Securities
and Exchange Commission, I am
going to teach you how to
navigate the maze of
prospectus language that often
befuddles individual investors.
Easier
than it looks:
Finding and reading key
provisions within a stock
prospectus is not as bad as
everyone seems to think; and
right now, I'm going to prove it
to you.
Before we start, ask yourself
this quick question: if you were
paying 9.125% on your home
mortgage and had a chance to
refinance it to a new, lower
rate of 7.7% (fixed) without any
costs to you, would you do it?
Keep that in mind for the next
few paragraphs.
To
understand why Southwest Gas, in
August of 2003, was crazy enough
to offer 7.7% on
their new CDx3 Preferred Stock,
when the going rate was 6.75%,
follow along with me right now:
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pull up the prospectus that
Southwest Gas originally
filed with the SEC back in
August 2003 by
clicking here (a
separate browser window will
open on your computer screen
so you will not lose this
CDx3 Newsletter). You
will see a text document
displaying the Southwest Gas
logo. The document is dated
August 12, 2003 and was
filed by Southwest Gas for
4,000,000 shares of "7.70%
Preferred Trust Securities"
at a "liquidation
preference" of $25 per
share;
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every CDx3
Preferred Stock prospectus
includes a section titled "Use
of Proceeds" that describes what
the issuing company intends on
doing with your money.
Pull up the text search function
on your browser (Internet
Explorer and Firefox: look under
the Edit menu and click Find On
This Page) and search for the
phrase Use Of Proceeds.
The first two occurrences will
be in the Table of Contents;
skip these by clicking on Next.
The third occurrence is the one
that we are looking for.
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you will see a paragraph that
starts with the words "The Trust
will use..." This
paragraph goes on to explain
that Southwest Gas is going to
use the proceeds from the sale
of SWX-B to "call" (buy back
from its owners) a previous
preferred stock issue.
The
Use Of Proceeds paragraph in the SWX-B prospectus states that:
"...We intend to use all the net
proceeds from the sale of the junior
subordinated debentures
[that's code for preferred stock]
to redeem
the $60 million of 9-1/8% preferred
securities of Southwest Gas Capital
I..."
Southwest Gas was incented to offer
SWX-B at a 7.7% dividend
rate because they were going to use
SWX-B to generate the cash that they
would need to call an older
preferred stock that was costing
Southwest Gas 9-1/8%
(9.125%). This maneuver is
what Preferred Stock Investing
refers to as "refinancing" (PSI, page 54)
and that's exactly what it is - very
much like refinancing a mortgage.
Southwest Gas had an opportunity to
refinance an old preferred stock
that was costing them 9.125% to a
new preferred stock that would only
cost them 7.7%.
In
dollar terms, this refinancing
allowed Southwest Gas to stop
paying out $2.28 per share to
owners of the old preferred
stock in favor of paying out a
mere $1.92 per share to the
holders of the new SWX-B; a
savings of $0.36 per share on
4,000,000 shares every year
(pretty soon, we're talking
about real money).
Find
key provisions fast: By
using your web browser's text
search function, you can quickly
and easily navigate the
prospectus of a CDx3 Preferred
Stock (which can often run over
100 pages of legalese) for the
key provisions that most
individual investors are
interested in. The trick,
of course, is knowing the key
words and phrases that these
lengthy but important documents tend to use so
that you can find the key
provisions in seconds, rather
than minutes or even hours.
The CDx3 Special Report titled "Prospectus
For The Rest of Us" (PDF
format, $4.95) uses the
prospectus of several real CDx3
Preferred Stocks, on file with
the SEC, to teach you these key
words and phrases and how to
quickly and easily search for
them (sample
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purchase).
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Do the dividends generated by
preferred stocks 'compound' like
interest in a bank CD? -
Peggy G.
A common investment goal is to
reach a point where your
investments generate enough
income to become "self-funding" -
generating enough cash to
purchase the next investment
without requiring any new money
from you.
This mechanism is referred to as "compounding" and
is very easy to witness with savings accounts or
bank CDs and works in much the same way with a CDx3
Preferred Stock portfolio.
Example:
Even though the average dividend rate being paid by
today's new CDx3 Preferred Stocks is at 8.25%, let's
use a more common 7% to see how this works. A
CDx3 Preferred Stock that carries an annual dividend
rate of 7% means that the issuing company is going
to pay you 7% of $25.00 every year in dividend
income for every share that you own. It does
not matter what your original purchase price was,
nor does it matter what the current market price of
your CDx3 Preferred Stock is; dividends are paid
based on $25.00 (called the 'par' value) per share.
7% of $25.00 is $1.75 per year in dividend income to
you for every share. New CDx3 Preferred
Stocks are issued at a market price of $25.00 per
share. Let's assume for the moment that this
is your purchase price; each share that you purchase
costs you $25.00. To keep the math simple,
let's also assume that you always buy a single share
whenever you purchase a new CDx3 Preferred Stock.
In order for your CDx3 Portfolio to generate the
$25.00 needed for your next purchase, you would need
several CDx3 Preferred Stocks pumping out $1.75 each
in dividend income, right? Specifically, you
would need fifteen CDx3 Preferred Stocks in your
CDx3 Portfolio. With fifteen CDx3 Preferred
Stocks, each producing $1.75 per year in dividend
income, your CDx3 Portfolio will generate $26.25 per
year in dividend income - enough to purchase the
next CDx3 Preferred Stock with no new money from you
(and have $1.25 left over toward your next
purchase).
Since new CDx3 Preferred Stocks
are issued at a rate of about 1-2 per month, and
there will be times when you will decide to pass
(i.e. it is unlikely that every new issue is going
to be consistent with your personal financial
resources, goals and risk tolerance), it usually
takes about eighteen months for a CDx3 Investor to
reach the point where their CDx3 Portfolio becomes
"self-funding." It is for this reason that a
subscription to the CDx3 Notification Service
lasts for
eighteen months.
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Now to the beauty of compounding: As I have just
shown, the fifteen CDx3 Preferred Stocks in your
CDx3 Portfolio generate the cash you need to buy
number sixteen. Once you purchase number
sixteen, your CDx3 Portfolio will generate another
$25 even faster since you now have an additional
CDx3 Preferred Stock pumping out dividend cash.
As you can see by the chart below, your sixteen CDx3
Preferred Stocks generate enough dividend cash to
purchase the next CDx3 Preferred Stock (number
seventeen) in a little over ten months.
While it takes just over eleven months for fifteen CDx3
Preferred Stocks to generate the first $25 in
dividend income, once you have 32 CDx3 Preferred
Stocks, your CDx3 Portfolio will generate $25 in
dividend income every 5 months or so (the
compounding effect accounts for the uneven
increments in the horizontal axis on this chart).
If you make regular purchases, say one per month on
average, in less than three years your CDx3
Portfolio will be generating enough dividend income
to make the next purchase completely on its own
every few months.
This process accelerates with each new purchase,
your CDx3 Portfolio becomes the CDx3 Income Engine,
generating cash at an ever increasing rate -
compounding.
Thanks to Peggy G. for
the great question. You will receive a
complementary copy of the CDx3 Special Report
Dividend Accounting.
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Free CDx3
Special Report Also Has Free Companion Excel
Calculator
See How To Correctly Calculate Your
Effective Annual Return - FREE
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The Preferred Stock Investing Reader's Forum provides a
free special
Excel spreadsheet calculator that you can use to
calculate the effective annual return (EAR) of your
preferred stock investments. The calculator allows
you to just plug in a few parameters from your preferred
stock (such as purchase date, purchase price, sell
price, etc.) and see what your effective annual return
really is, or will be if you sell.
 When
you initially download the EAR calculator, it is set up
using the Series A CDx3 Preferred Stock from Dominion
Re-sources (D-A) as an example. This is the same CDx3
Preferred Stock that is used as an example through-out the CDx3
Special Report titled "Calculating Your Rate Of
Return."
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As a
recipient of this monthly CDx3 Newsletter,
you are entitled to a FREE copy of "Calculating Your
Rate Of Return." So, get
them both - FREE - and use them together to
learn how to correctly calculate your rate
of return on this type of investment. To download your free copy
of Calculating Your Rate Of Return, just click on
the following email address:
CDx3Newsletter@PreferredStockInvesting.com .
No need to type anything in the body of the
message, just click the Send button.
You will receive an auto-reply email message
with download instructions for your free
CDx3 Special Report.
To see the entire library of useful and
educational CDx3 Special Reports, including
three sample pages from each one,
click here.
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Consensus: Banks See End Of Tunnel Ahead
Federal Reserve Board And Others Report Progress
The Federal Reserve Board's aggressive
involvement in the March JPMorgan acquisition of
Bear Stearns, effectively guaranteeing that the
federal government would not allow Bear Stearns
to bust, precipitated several articles in the
financial press saying that this action by the
Fed had effectively ended the "credit crisis"
that our financial institutions have been faced
with since last summer. By their action,
the Fed was making it very clear just how
committed they really were to preserving our
financial markets. All were anxious to see
what would happen throughout April - would
investors act on such commitment and optimism or
would they continue to hoard cash like a
chipmunk ahead of winter?
During April, investors did indeed start returning
massive amounts of cash to the market. The
price of treasuries and gold, two favorite hoarding
places, dropped dramatically throughout April (gold
fell from well over $1,000 per ounce to the high
$800's); the amount of daily loans sought by banks
fell to $24.8 billion from $32.6 during the week of
April 16 (source: Federal Reserve); and
Citigroup, the nation's largest bank, posted higher
than expect first quarter revenue and cut its
quarterly loss in half from the previous quarter.
The March declarations that the "Worst Is Over"
appear now to have been more correct than simply
optimistic.
In late April, the Fed reduced interest rates again
by 1/4 point, which was widely expected. But
their comments that accompanied this reduction
seemed to confirm that banks were, in fact, seeing
light at the end of this tunnel of misery. The
Fed signaled that after this 1/4 reduction, there
was likely to be a pause in such policy actions to
allow time to evaluate the markets. The Fed
has no meeting scheduled for May, so it is likely to
be June before there is any more action by the Fed,
if then.
In next month's CDx3 Newsletter, I will report back
to you on the effect that the Fed's pause has on the
market for CDx3 Preferred Stocks going into the
summer.
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Remember, I'm not a stock broker;
I'm not trying to sell preferred
stocks to you; and I don't sell
investment advice. I'm an
investment researcher with an
economics and statistics
background who has developed a
simple way to earn a respectable
return at very low risk. And I've
written it down in
Preferred Stock Investing.
I'm hopeful that you find these
monthly CDx3
Newsletters interesting, and
will consider learning more by
purchasing my book, Preferred
Stock Investing or by subscribing to
the
CDx3 Notification Service.
Please
take a look at
www.PreferredStockInvesting.com. And don't forget
about my
FREE SPECIAL OFFER.
Know
someone who might be interested in simple,
low-risk investing for non-investment
experts? Have them send an email
message to
CDx3Newsletter@PreferredStockInvesting.com and
they will automatically
begin receiving this monthly CDx3
Newsletter
next month (plus a
CDx3 Special Report) - all FREE.
Then they can make up their own mind.
Many Happy Returns,
Doug K. Le Du
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