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|In This Issue...|
April 2010 Update to Preferred Stock Investing Now Available!
Readers of my book, Preferred Stock Investing, Third Edition, are entitled to free periodic updates to the preferred stock tables presented throughout chapter 15 of the book as long as the Third Edition is in print. Providing free periodic updates helps keep readers of Preferred Stock Investing up to date.
The April 2010 update to Preferred Stock Investing is now available!
And I am also happy to announce that as a special service to readers, the April 2010 update goes beyond an update to the preferred stock tables found in chapter 15. In this update I also take the opportunity to provide you with the results of the "CDx3 Income Engine" (the preferred stock investing method explained throughout the book) as implemented throughout the Global Credit Crisis (2007 - 2009). The nature of the preferred stock market since June 2007 deserves special attention and the April 2010 update to the book would not have been complete without wrapping up the method's performance during these historic (extreme) conditions.
Specifically, the April 2010 update to the Third Edition of Preferred Stock Investing includes updates to the following chapters:
Preferred Stock Investing, Third Edition is one of the most highly reader-rated books of any kind available for sale in the United States (Amazon 4.5 stars). To receive the free April 2010 update to Preferred Stock Investing, Third Edition just follow the instructions on the first page of chapter 15 in the book.
If you have yet to pick up your copy of Preferred Stock Investing, Third Edition you can do so at any of your favorite online retailers (see retailers | see reader reviews). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free April 2010 update.
Just Posted On The Preferred Stock Investing Reader's Forum: During the Global Credit Crisis, cash-starved banks bid up the dividend rate being offered by newly issued preferred stocks all the way to 9.6%. Now that the market has recovered, new preferred stocks are able to be issued at about their pre-crisis level closer to 7%. In a May 11 post to the Preferred Stock Investing Reader's Forum (my "blog") titled "Conditions Right For Preferred Stock Calls" I describe how this recovery has made it possible for companies to start calling (buying back from you at $25 per share) older preferred stocks and show you the first preferred stock call that we have had since September 2007. (jump to Forum)
The Last Month's CDx3 Investor Results article uses three charts to illustrate how, even though preferred stock dividend rates have recovered to their pre-crisis levels (now paying about 7% again), bank CD rates, closely tied to the near-zero federal funds rate, have continued to fall. The average of the top ten 24-month bank CD payers in the U.S. at the end of May 2010 was a miserly 1.972%. (jump to article)
There are two Special Announcements for preferred stock investors this month. First, subscriber's to the CDx3 Notification Service have their own exclusive website that is the most comprehensive resource available to preferred stock investors. This month, I provide you with a link to take a tour of the exclusive subscriber's website. Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Third Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article)
In the CDx3 Company Spotlight article I introduce you to Vornado Realty Trust, one of the largest real estate owners and managers in the United States with over 100 million square feet in its portfolio. Read how Vornado, after purchasing 1540 Broadway, the best block front in Times Square, acquired the 11-store Virgin franchise in New York in order to gain control over Virgin's below-market Time Square lease. (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 came directly from a CDx3 Notification Service subscriber who, like many preferred stock investors right now, is wondering how to calculate the effective annual return of a preferred stock investment. (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)
Coming Up For Preferred Stock Investors: The perfect storm of issues (SEC/Goldman, bank regulation, Greece/eurozone, BP/oil, Korea) is molding the marketplace for the highest quality preferred stocks into three specific opportunities, one right now, one in the mid-term and another in the longer-term. Read who stands to gain, when, why and how in the Next Month's Sneak Peek article. (jump to article)
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Preferred Stock Dividend Rates Now At Pre-Crisis Level; Bank CDs Still Falling
Ouch! - Inflation Rate Now Exceeds Bank CD Interest Rates
While the dividend rate being paid by new issues of the highest quality preferred stocks has returned to pre-crisis levels, bank Certificates of Deposit (CDs) are still heading the wrong direction. For the first time in many, many years, the average of the top ten interest rates that you can earn on a 24-month bank CD in the U.S. fell below 2% during May.
The average of the top ten 24-month bank CD payers in the U.S. at the end of May 2010 was 1.972% (taxable).
As investors, we choose our investments from the alternatives available at the time. We make the best decisions that we can make from the available alternatives at the time that we have to make them. We shop. Since most preferred stock investors are low-risk investors, we continually find ourselves comparing the yields provided by bank CDs to those offered by the highest quality preferred stocks ("CDx3 Preferred Stocks," see sidebar at the top of this newsletter).
Three years ago, in May 2007, just before the Global Credit Crisis began, high quality preferred stocks offered an additional annual return of 1.7% over and above what a 24-month bank CD was paying (chart 1). Newly issued high quality preferred stocks were offering an average dividend rate of 6.9% while a 24-month bank CD was offering 5.2%. So an extra 1.7% was what it took in May 2007 to motivate investors to invest in CDx3 Preferred Stocks rather than bank CDs.
Bank CDs Have Yet To Recover
Now, three years later, the dividend rate offered by newly issued CDx3 Preferred Stocks has returned to its pre-crisis level (about 6.8%). But bank CDs have yet to recover. During the Global Credit Crisis bank CD interest rates dropped and they are still dropping (chart 2).
Bank CD interest rates are much more closely tied to the Federal Reserve's monetary policy than is the dividend rate being offered by newly issued higher quality preferred stocks. Since the Fed still has the federal funds rate set at near-zero in order to help stimulate the economy, we have a case where CD interest rates continue to fall even though CDx3 Preferred Stock dividend rates have returned to pre-crisis levels.
Since CDx3 Preferred Stock dividend rates have returned to normal, bank CD interest rates that continue to fall have created a massive premium for preferred stock investors. The gap between the two is now 4.8%, up from the pre-crisis level of 1.7%. Preferred stock investors are being paid an extra 4.8% per year not because preferred stock dividend rates have gone up, but because bank CD interest rates are now at some of the lowest levels that we have ever seen.
Inflation: Adding Insult To Injury
Two percent is an important rate for bank CD investors because the Federal Reserve has a stated policy of keeping the annual inflation rate at, or below, that level.
An inflation level of 2% is actually pretty healthy. It indicates that there is consumer demand throughout the economy and economic growth. But it also means that if you hold a bank CD that pays less than 2%, you are losing all of your interest earnings to inflation. By the time that CD matures and you get your principal back from the bank, you will have less purchasing power than you use to have, despite the interest earnings.
The April 2010 Consumer Price Index (latest available) came in at 2.24%. Since the interest rates being paid by bank CDs have continued to fall, they have now fallen below the rate of inflation (chart 3). And don't forget that the interest earned by those bank CDs is taxable as well.
Bank CD investors need to understand that the net annual return on bank Certificates of Deposit is currently less than zero.
No single investment is perfect for every investor and that is just as true with high quality preferred stocks. And the euro mess has caused U.S. goods and services to become more expensive for Europeans, reducing inflation pressures here in the U.S.. So we should see the inflation line start to move down in the coming months, at least temporarily.
But when the rate of inflation moves above bank CD interest rates, which it is right now, low-risk investors may find that high quality preferred stocks offer a more attractive alternative.
As discussed in the sidebar at the top of this newsletter, high quality preferred stocks carry investment grade ratings, are issued by a company that has never suspended a preferred stock dividend, have the "cumulative" dividend requirement (which means that if the issuing company skips a dividend payment to you they still owe you the money) plus meets the other seven selection criteria itemized in chapter 7 of my book, Preferred Stock Investing, Third Edition.
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. 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.
With bank CD rates so low, and likely to stay that way for "an extended period," maybe it's time that you considered the highest quality preferred stocks. Invest in the best. Subscribe to the CDx3 Notification Service (see reader comments) today.
Tour The Subscriber's Website: The Most Comprehensive Resource Available
Preferred Stock, Company And 24/7 Marketplace Information In One Place
The subscriber's website provides subscribers with the most comprehensive resource available for preferred stock investors, including the CDx3 Discussion Group - the only online forum just for preferred stock investors. See the testimonial quote at the top of this CDx3 Newsletter and you'll see what I mean!
The design of the subscriber's website is a direct result of specific input from subscribers through our Continuous Improvement Program.
The subscriber's website is the vault within which I keep research information regarding selecting, buying and selling the highest quality preferred stocks ("CDx3 Preferred Stocks"), the companies that issue them and the marketplace that they trade within.
Once a subscriber signs onto the subscriber's website, the CDx3 Preferred Stock Market Dashboard is presented. The Dashboard provides these seven feature boxes, each of which provide their own focused information, both current and historical:
Take A Tour: The website's Tutorial has several components to it, including a description of the site's features. I have made a copy of the website's feature tutorial available to you. Click on the below link to take a quick tour of the subscriber's website Dashboard.
Preferred stock research is very hard to come by. The CDx3 Notification Service is intended for individual investors as well as groups (investing clubs, brokers, families or groups of friends) and all information is provided in plain English for non-experts. If you want to get serious about your preferred stock investments, maybe it's time for you to subscribe to the CDx3 Notification Service too (see reader comments).
Brokers And Investment Groups: New 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.
Who Are These Companies That Issue CDx3 Preferred Stocks?
Vornado Realty Trust (NYSE: VNO)
Vornado, one of the largest owners and managers of real estate in the United States, is a $14 billion real estate investment trust headquartered in New York City. Vornado has over 100 million square feet of office and retail space in its portfolio. Its major holdings include 28 office properties in New York City (primarily midtown Manhattan), 81 properties in Washington D.C., 164 retail properties in 21 states, Washington D.C. and Puerto Rico and the 3.4 million square foot Merchandise Mart in Chicago.
Among its competitors, Vornado is very interesting in that it operates a bit outside the box. Where most of its competitors build or buy buildings and lease them out, Vornado not only does that but in many cases takes an ownership role in some of its larger tenants. For example, in 2006 Vornado acquired a 33% interest in Toys R Us which was performing badly in the face of stiff competition from Wal-Mart and Target. After hiring ex-Target executive Gerald Storch, the company returned to profitability and in May 2009 bought out competitor FAO Schwarz. After the acquisition, Storch located FAO boutiques in over 600 Toys R Us stores to leverage the brand's image of quality and customer service.
Now profitable, on Friday, May 28, 2010 Vornado and its partners in Toys R Us announced in an SEC filing that they will be taking the retailer public under the NYSE trading symbol TOYS in an $800 million IPO.
Acquiring an interest in your tenants allows you have more control of the lease. In 2006 Vornado acquired the retail portion of 1540 Broadway, the best block front in Times Square that, at the time, housed a variety of under-market tenants including Virgin. Not only did Vornado acquire the property, but they went on to acquire the entire 11-store Virgin chain in order to get at the lease. With this property now sporting new tenants, Vornado will realize a double-digit return on their $350 million investment.
Reader Note: The purpose of the CDx3 Company Spotlight article is to give you a sense of the types of companies that issue CDx3 Preferred Stocks. Companies that appear in the CDx3 Company Spotlight either currently, or in the past, have issued CDx3 Preferred Stocks. Since I am not familiar with your financial goals, resources or risk tolerance, my mention of these companies here should not be taken as a recommendation by me for you to buy, or not buy, securities issued by these companies. Companies can issue multiple series of preferred stocks, some of which may meet the CDx3 Selection Criteria while others do not.
How do I calculate the Effective Annual Return of a preferred stock investment upon its call?
Thanks to subscriber "mnwoods" who posted this question to the CDx3 Discussion Group on the subscriber's website. Subscribers to the CDx3 Notification Service have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors. It's a great place to ask questions and share ideas with fellow CDx3 Notification Service subscribers - brokers, financial planners and seasoned preferred stock investors from all over the world.
Here's a major hint: When you signed up for this free CDx3 Newsletter, you received an auto-reply email message that provided you with a download link to a free copy of the CDx3 Special Report titled "Calculating Your Rate Of Return." That CDx3 Special Report, also available here, uses a real CDx3 Preferred Stock to illustrate how to perform this calculation. The report also shows you why other commonly used methods produce an incorrect answer.
The easiest way to calculate the Effective Annual Return (EAR) of a preferred stock investment is, of course, to use a calculator. Calculating Your Rate Of Return provides the Microsoft Excel formula needed to perform the EAR calculation. You can follow the same procedure using a financial calculator. Just remember that this question assumes that the issuing company calls (buys back from you for $25 per share) your preferred stock on its call date, so use that as your sell date and sell price.
When contemplating your possible buying and selling activities, knowing the EAR of your preferred stock investing alternatives allows you to make more informed decisions.
The question this month for preferred stock investors:How do I calculate the EAR of a preferred stock investment upon its call?
Add up the total income you've earned (dividends plus capital gain)
and divide by your invested amount.
(C) Calculate the quarterly internal rate of return, then compound the result for four quarters.
The correct answer to this question is (C). What makes this calculation more tricky than it would be otherwise is that you have to include something called the "time value of money."
The time value of money is a well known, intuitively obvious concept that is very easy to illustrate: if I were to offer you $100 today (free and clear, no strings attached) or the same $100 delivered to you 10 years from now, which would you pick?
When it comes to the value of a buck, sooner is always better. That's the time value of money. Having the same money sooner has more value than having the same money later. The reason, of course, is that if you have the money now, versus later, you have the opportunity to do something with it such as invest it and generate additional returns (which you could also then reinvest in compounding fashion).
That's why answer (A) is incorrect. Simply adding up your income and dividing it by the amount you have invested just gives you the percentage of your investment that you have realized in the form of additional returns. It does nothing to accommodate the time value of money.
Answer (B) is also incorrect because it not only does not capture the time value of money that you realize by receiving periodic dividend payments over the life of the investment (purchase date to call date), but it assumes that you have no capital gain or loss (i.e. that you originally paid $25 per share, the same as the call price). My book, Preferred Stock Investing, shows you how to always purchase your CDx3 Preferred Stock shares for less than $25, regardless of market conditions, increasing your chances to pile a capital gain on top of your dividends.
To calculate your actual EAR, you first have to calculate your return for a quarter (the period over which you receive the dividend) using the Excel RATE function. The result is called the internal rate of return. Then compound this quarterly value for four quarters using this formula: [ (1 + r)^4 ] – 1, where r is the quarterly internal rate of return value from the RATE function.
The result is your Effective Annual Return.
The exclusive website for subscriber's to the CDx3 Notification Service provides a very robust Excel-based What-If EAR Calculator. Using the calculator, subscribers can just plug in the particulars of their preferred stock (purchase date, purchase price, dividend rate, etc.) and instantly see the EAR, dividend yield, quarterly cash income and many other key values. The calculator also allows subscribers to test trading strategies such as selling one issue and using the proceeds to buy another, calculating break-even price points and impact to income in advance.
The CDx3 Special Report "Calculating Your Rate Of Return" walks you through the entire calculation, step by step, including the setup of the Excel RATE function for your preferred stock. Knowing how to calculate your EAR is essential for preferred stock investors.
You can submit your own preferred stock question: Submit your question.
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.
You are also invited to visit the Forum and comment on my articles.
"Perfect Storm" Creates Three Opportunities For Preferred Stock Investors
Which Preferred Stock Investors Will Benefit, How, When And Why
The perfect storm that will occupy our headlines for several more months (SEC/Goldman, bank regulation, Greece/eurozone, BP/oil, Korea) is producing short-term (and short-lived) buying opportunities for those investing in high quality U.S. preferred stocks.
Over the next six to twelve months, however, these events are likely to result in a period of stable or slightly higher preferred stock market prices (good for sellers). And over the longer-term (next year) the market prices of existing high quality preferred stocks are likely to be somewhat lower again, producing another portfolio-building opportunity for preferred stock investors. Here's why.
Immediate-Term, Right Now:As I mentioned to you last month, on days when big negative headlines appear, market prices have been taking short-lived down spikes, creating buying opportunities for a very specific list of eleven high quality preferred stocks. These down spikes are only lasting for a few days, if that, but have been really great for buyers. Over the last few weeks we have been able to purchase CDx3 Preferred Stocks from this list at market prices that we thought were gone forever. The list of these eleven specific preferred stocks was provided to CDx3 Notification Service subscribers in the May issue of the subscriber's newsletter, CDx3 Research Notes.
Mid-Term, Six To Twelve Months:The Greece/eurozone component of the perfect storm is easing U.S. domestic inflation because it is strengthening the U.S. dollar in relation to the euro. Before the Greece/eurozone debt meltdown started to gain speed a couple of months ago, Europeans were able to buy about $1.50 worth of U.S. goods and services with one euro. Today, however, their euro only buys them about $1.25 worth of U.S. products. So euro-using consumers now have to spend more euros when shopping for U.S. goods, pushing European consumers away. Consequently, the Greece/eurozone mess has eased U.S. domestic inflation pressure.
Also, the Greece/eurozone sovereign debt crisis has caused large global investors to move away from eurozone-issued debt securities (eurozone government bonds) and move into U.S. treasuries. This huge increase in demand for U.S. treasuries has increased their market price and, hence, lowered their yield. Just as with a strengthening of the U.S. dollar against the euro, falling treasury yields also takes pressure off of the Federal Reserve to start increasing the federal funds rate.
Increases in the federal funds rate tend to lead to lower market prices for preferred stocks. While good for buyers, an increasing federal funds rate tends to take away the great selling opportunities that preferred stock investors have been enjoying for over a year now.
So the Greece/eurozone mess has reduced inflationary pressure while simultaneously pushing treasury yields down, both affects allowing the Fed to delay any pending increase in the federal funds rate which, in turn, relieves downward pressure on preferred stock market prices.
Until the Fed starts raising the federal funds rate again, U.S. preferred stock investors are likely to continue enjoying selling (capital gain) opportunities.
Longer-Term, 2011?: Once the Fed starts increasing the federal funds rate, which is now less likely to happen this year than it was before the perfect storm set in, preferred stock investors will see two things happen, both of which benefit buyers: (1) the dividend rate offered by newly issued preferred stocks tends to increase right along with increases in the federal funds rate (although there are occasional, short-lived exceptions) and (2) market prices of older, existing preferred stocks will tend to fall. Increasing dividend rates combined with bargain basement market prices produces a great opportunity for preferred stock investors to build their portfolios with high yielding (8%+), high quality issues. At the moment, we are looking forward to next year to do so.
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
to screen, buy and sell the highest
quality preferred stocks by
the third 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 Third 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 Third 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) 2010 by Doug K. Le Du
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.