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|In This Issue...|
New Fourth Edition of Preferred Stock Investing!
Readers of Preferred Stock Investing learn how to screen, buy and sell the highest quality preferred stocks.
The Fourth Edition is now available at your favorite online retailers (see retailers).
Just published in June, the Fourth Edition of Preferred Stock Investing includes the latest research and updated charts and examples using real preferred stocks.
And Part III "Buying When The Market Favors Buyers" has been completely re-written to focus on the buying conditions that we will be facing throughout 2011 and 2012. Check out the new Fourth Edition Table of Contents.
The preferred stock investing method explained throughout the book - the "CDx3 Income Engine" - uses three rules and ten selection criteria to accomplish its three objectives: maximize revenue while minimizing risk and minimizing work. The results are itemized in chapter 15 for every qualifying preferred stock issued since January 2001 - ten years worth of the highest quality issues.
A new chapter has also been added (chapter 11, "The Crisis That Keeps On Giving") that describes two specific opportunities for preferred stock buyers. Both of these opportunities were created by the 2007 - 2009 Global Credit Crisis and are expected to remaining available well into 2012.
Preferred Stock Investing is one of the highest reader-rated books available at Amazon and sells within the top 2% of all book titles in the United States. Look for your copy of Preferred Stock Investing, Fourth Edition at your favorite online retailer.
Just Posted On The Preferred Stock Investing Reader's Forum: On July 14, 2011 the debt ceiling debate was in high gear and many preferred stock investors were starting to wonder where the opportunities might be in the event that Washington was unable to strike a deal. While a deal was eventually reached, my post titled "National Debt Ceiling - What's In It For Preferred Stock Investors" explained what to watch for if August 2 came and went without a deal. (jump to Forum)
The Last Month's CDx3 Investor Results article explains how the rate-stabilizing August 2 debt ceiling settlement has combined with a legal requirement for real estate companies (REITs) to create an interesting opportunity for preferred stock investors. The top 20 REIT preferreds itemized here provide a higher return at lower investment risk than the same company's common stock shares. (jump to article)
The Special Announcement article provides you with an updated list of trust preferred stocks (TRUPS) that will be among the first to be affected by Section 171 of the Wall Street Reform and Consumer Protection Act. Remember that subscribers to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive this same list with all of the trading symbols. This month's list itemizes ten of the highest rated, highest quality trust preferred stocks. Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Fourth 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 W.R. Berkley, a $4.3 billion insurance company founded in 1967 and headquartered in Greenwich, Connecticut. The chart presented in this article illustrates how much better the company has done than its industry peers in anticipating, and reserving cash for, the largest disaster events since hurricane Andrew struck in 1992. (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 - "How do I avoid purchasing a preferred stock that I can never sell?" (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: Interest rates need to be managed as a matter of monetary policy. For better or worse, this task rests with the Federal Reserve. Had Washington failed to reach a settlement on the debt ceiling, it is likely that the Fed would have lost control, at least to a certain extent, of interest rates throughout our economy. Actions by rating agencies, as U.S. sovereign debt was subject to downgrades, would have been driving rates rather than deliberate policy actions. (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.
REIT Preferreds – 5 Reasons Preferred Stock Investors Should Be Paying Attention
Debt Ceiling Deal Stabilizes Rates, Pushes 20 REIT Preferreds To Top Of List
The debt ceiling debate is now behind us and the conditions that remain highly favor preferred stocks issued by real estate companies. There are 20 specific high quality REIT-issued preferred stocks that are currently available on U.S. stock exchanges deserving of your attention. For the five reasons provided below, these 20 issues floated right to the top of the list and should be in your cross-hairs.
Economists: No Change In Interest Rates Until At Least 2013
Before and during the debt ceiling debate more economists declared their position with respect to the future of interest rates. Economists at Barclays Capital said in a July 29 report that they now expect the Fed to keep its federal funds rate unchanged through 2012. Shyam Rajan, an interest rate strategist at Bank of America Merrill Lynch in New York, one of the 20 primary dealers that trade with the Fed, declared in an interview last week that “these are perfect conditions for the Fed to stay on hold for the foreseeable future…You’re never going to get the Fed to raise rates” with the economy growing below the long- term trend of 3 percent.
Such sentiments echo earlier
pronouncements by others such as Jan Hatzius, chief US economist at
Goldman Sachs, that "in terms of the level of interest rates, we
still think that they will basically be at zero in 2011 and probably
in 2012 as well” (CNBC interview, January 3, 2011).
10 Million New Jobs Needed
The "no interest rate increase until at least 2013" position is based on the notion that the Fed will not tighten the screws (by increasing the federal funds rate) until they see consumption-driven inflation.
And you cannot have consumption-driven inflation until you cut the number of unemployed workers in the U.S. by about half. In numeric terms, that means that about 10 million new private sector jobs have to be added before the resulting increase in consumer demand starts pushing prices up, triggering the Fed to increase interest rates.
Because of this expected environment of low and stable interest rates preferred stock investors should start paying attention to real estate companies.
Real Estate Companies Must Distribute Profits
The profit that Real Estate Investment Trusts (REITs) make comes largely from the spread between the return on their property rents charged to tenants and the cost of the debt service (interest expense) on the loans for those properties. You’re profitable if you can borrow cash to build a building at 7% and then make a 15% return on rents from the tenants in that building.
Doom-and-gloomers have been telling us that we are a week away from a massive commercial real estate meltdown for about four years now. Real estate companies, we’ve been repeatedly told, will see their occupancy rates go to something close to zero and empty buildings will be chopped up and sold off as firewood. “But look at how much debt they have!!!” the doom-and-gloomers have repeatedly screamed.
And it’s true, of course. From 2002 through 2006 these companies took on mountains of debt to finance the expansion. And that debt started coming due in 2007, just as recession-beaten tenants started terminating leases and moving out in droves.
It was at that point that the doom-and-gloom crowd started to watch out for pieces of sky. But what they were assuming is that the lenders to these companies (namely bond holders) would make the irrational decision of forcing the real estate company to whom they had loaned money to fail, rather than simply renegotiate the ongoing terms of the maturing debt.
Given a choice between sticking with the original terms and forcing the company into bankruptcy (door number 1) or renegotiating new terms that allowed the company to stay in business and continue to make reduced or extended payments (door number two), the bond holders most frequently opted for door number two; and why wouldn’t they?
As a result, well managed REITs, despite lower occupancy rates in many cases, are making their debt payments while enjoying healthy profits.
A REIT, as defined by U.S. tax code, is essentially exempt from
federal income tax on those profits. In order for the exemption to
continue, the company must distribute at least 90% of its profits to
shareholders (the IRS then collects its taxes from the shareholders
rather than from the company).
Higher Returns At Lower Risk – How Is That Possible?
REITs, like most companies, offer both common stock and preferred stock to investors like us. But because of the 90% profit payout requirement and the very profitable interest rate climate we find ourselves in, REIT preferred stock shares offer a much better choice for many investors since:
1. The 90% profit distribution requirement creates a cast-in-law dividend payout requirement for these companies, no getting around it if they want to hold onto their REIT status;
2. Preferred stockholders, by definition, are always paid first, before the same company’s common stockholders see a dime, hence lowering risk to the preferred stock investor;
3. The highest quality REIT preferreds are currently offering a fixed annual dividend yield of about 7%, greater than the same company’s common stock yield in many cases;
4. Many REIT preferreds carry the ‘cumulative’ dividend requirement meaning that if the company misses a dividend payment to you they have to make it up to you downstream; they still owe you the money, which is not the case with their common stock dividends; and
5. High quality REIT preferreds are evaluated by rating agencies and have investment grade ratings – these company’s common stock shares, on the other hand, carry no such rating.
These five points mean that we have a rare set of conditions where the lower risk alternative (REIT preferreds) actually offers a higher return when compared to the same company’s common shares – the complete opposite of the usual risk/reward trade-off that investors have come to expect.
Combining all of that with the low interest rate environment that is now expected to prevail until at least 2013 (as affirmed by the debt ceiling settlement) and we have conditions that highly favor those preferred stock investors looking to preferred stocks issued by REITs.
The Top 20 REIT-Issued Preferred Stocks
Now take a good look at this table. I used the Preferred Stock ListTM software application available on the CDx3 Notification Service website (my preferred stock email alert and research newsletter service) to pull a list of the highest quality REIT-issued preferred stocks available on U.S. stock exchanges right now. Note that in order to preserve subscription values the symbols and descriptions of these preferreds have been obscured here but are available to CDx3 Notification Service subscribers (see the August 2 CDx3 Discussion Group topic titled "Top 20 REIT Preferreds").
All of these preferred stock issues are rated investment grade, have the cumulative dividend provision and are issued by companies that have a perfect track record of never having suspended a preferred stock dividend.
I further limited this list to just those issues that are available for less than $25.00 per share (August 1, 2011 prices). This is very important since preferred stock investors not only help protect themselves from a principal loss, but also position themselves for a capital gain in the event of a call by always purchasing their shares for less than $25 each (see Preferred Stock Investing chapter 14 "Selling To Your Built In Buyer").
The stable interest rate environment
that we now have, as reinforced by the debt ceiling settlement, has
combined with the profit earning and distribution nature of REITs to
push these specific 20 preferred stocks to the top of the pile. And they are providing an average
of about 7% right now.
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 new Fourth Edition is 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 Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.
UPDATED: This Month's Under $25 Trust Preferred Stock List
10 Big Bank TRUPS Available For Less Than $25 Per Share, 7.0% Average Yield
This month there are 10 preferred stocks offered by our Big Banks that provide a potential layer of principal protection not available with many other preferred stock issues. This table presents an updated list of Big Bank-issued trust preferred stocks (TRUPS) that will be among the first affected by section 171 of the Wall Street Reform and Consumer Protection Act, signed into law on Wednesday, July 21, 2010.
Section 171 created what is probably the largest single opportunity for preferred stock investors in history.
Effective January 1, 2013, the new law prohibits Big Banks (assets greater than $15 billion) from counting their TRUPS in their "Tier 1 Capital" calculation, a measure regulators watch when assessing the adequacy of a bank's reserves. These Big Banks are therefore likely to retire ("call") their TRUPS. Investors who hold shares of a TRUPS when it is called will receive $25.00 per share, so investors who purchase shares now for less than $25 position themselves for a capital gain on top of the above-average dividend income that they will be earning in the meantime.
By watching this list each month, you will be able to monitor this opportunity as the January 1, 2013 implementation date approaches (expect prices to generally increase toward $25.00 per share).
Since market prices change every day, the list of affected TRUPS selling for less than $25 per share changes as well. So I will provide you with an updated list in this Special Announcement article every month. These are the highest rated, highest quality issues that are going to be first affected by section 171 of the new law that are also selling for less than $25 per share right now.
Subscriber's to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) are provided with this same TRUPS list, including the trading symbols, on page 7 of each monthly issue of the subscribers' newsletter, CDx3 Research Notes. Please consider becoming a subscriber to the CDx3 Notification Service today.
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.
Who Are These Companies That Issue CDx3 Preferred Stocks?
W.R. Berkley (NYSE: WRB)
W.R. Berkley is a $4.3 billion property and casualty insurance company established in 1967 and headquartered in Greenwich, Connecticut. It operates in five segments of the property casualty insurance business: Specialty lines of insurance, including excess and surplus lines, premises operations, professional liability and commercial automobile; Regional commercial property casualty insurance; Alternative markets, including workers' compensation and the management of self-insurance programs; Reinsurance, including treaty, facultative and Lloyd's business; and International (Australia, Hong Kong, South America, the United Kingdom and Continental Europe).
Like most property casualty insurance companies, WRB's loss risk comes largely from large scale disasters, natural or manmade. The trick, of course, is to guess where those disasters are most (or least) likely to occur and save up a surplus of cash with which to pay claims in the event that you have guessed wrong.
WRB's strategy is to focus its business in industries that it understands and in geographies that it feels are of lower risk; then price policies and cap coverage in a manner necessary to generate adequate surplus cash in the event that disaster strikes.
This chart illustrates the success of WRB's Ouija board. Starting with Hurricane Andrew in 1992, WRB has suffered substantially lower event losses, as a percentage of its surplus, than the rest of the industry.
WRB has a long history of making better guesses than many of its insurance industry peers. In fact, WRB suffered essentially no losses from the world's two most recent large disasters - the New Zealand earthquake on February 22, 2011 that killed dozens and the March 11, 2011 Japan earthquake where losses continue.
Throughout the first six months of this year, however, the company has not been quite as fortunate as several severe weather events in the U.S. have produced increased claim demands from policyholders.
The company just published its second quarter financial results on July 26, 2011 showing the effects of these losses on their second quarter net income.
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 avoid purchasing a preferred stock that I can never sell?
I receive email from readers who, before they knew better, have owned certain preferred stock issues for many, many years that they never seem to be able to sell without taking a capital loss. By understanding one of the Three Rules of Market Price Predictability (Preferred Stock Investing, chapter 3), there is a simple way to never have any of these zombies stuck in your portfolio.
Historically, investment grade preferred stocks have a declared dividend rate between 6% and 9%.
Preferred stock investors who wish to sell their shares at some point in order to earn a capital gain have two opportunities to do so. First, since preferred stock market prices rise and fall over time, a preferred stock investor can sell on the open market for a capital gain if the market price rises enough to motivate him or her to do so.
Alternatively, the investor could hold onto their shares, continuing to collect the quarterly dividend income, until the issuing company "calls" the issue. Five years after the preferred stock is introduced the issuing company regains the right to "call" it which means they will buy your shares back from you at $25.00 per share (no more, no less). So if you originally purchased your shares for a market price less than $25 (which Preferred Stock Investing teaches you how to do) you are in for a capital gain in addition to the great dividend income that you have been earning in the meantime.
But what happens if you purchase a new preferred stock and the market price never seems to rise above your purchase price and the issuing company never shows any interest in calling the issue? You continue to receive the steady dividend income every quarter but your principal is tied up (unless you sell for a capital loss).
The market price never seems to exceed $25 per share and, since the dividend expense is so low, the issuing company is unlikely to ever call the issue (they will opt to just continue paying out the quarterly dividend). Buying very low dividend paying preferred stocks can put you into a situation where, even though you will continue receiving dividend income, your principal becomes locked up (without selling and taking a capital loss).
To avoid this scenario preferred stock investors should "stay off the bottom" (as Preferred Stock Investing puts it, page 185).
The question this month for preferred stock investors:How do I avoid purchasing a preferred stock that I can never sell?
Avoid purchasing a preferred stock with a declared dividend rate
The correct answer to this question is (B): avoid purchasing a preferred stock with a declared dividend rate below 6.5%.
Knowing the answer to this question requires an understanding of the Rule of Rate/Price Opposition (Preferred Stock Investing page 53), one of the Three Rules of Market Price Predictability.
This Rule says that the dividend rate offered by new preferred stock issues and the market prices of previously introduced, older issues will move in opposite directions. Rates up, prices down and vice versa. Keep that in mind as I walk you through this explanation.
When a new preferred stock is introduced it is priced at $25.00 per share. The declared dividend rate is set at a level where there is a market for it at $25. Let's say that the "going dividend rate" of a new CDx3 Preferred Stock is 6.0% today and you purchase it for $25.00 per share. Now a year goes by and rates have gone up to, say, 7.0%. If, a year from now, $25 gets me 7.0%, what do you think is going to happen to the market price of your 6.0% payer? It will be less than $25, of course. Rates up, prices down.
Since the historic bottom dividend rate for high quality preferred stocks is 6.0%, rates have nowhere to go but up in our example so, using the Rule of Rate/Price Opposition, the market price of your 6.0% payer has nowhere to go but down once rates bounce off the bottom.
Also, the issuing company of a 6.0% preferred stock is unlikely to ever call it (buy it back from you) since 6.0% is very cheap money to them.
To protect yourself from purchasing a preferred stock that you can never sell (without a capital loss), preferred stock investors should be very careful about purchasing new preferred stock issues that have a declared dividend rate less than 6.5%. If rates are falling, and you purchase a 6.5% payer, you still have some room to maneuver. As rates fall to 6.0% the market price of your 6.5% payer will go up, creating a selling opportunity for you. As rates then bounce off of 6.0% and head back up, you'll have some warning.
But if you purchase a 6.0% preferred stock you are very likely to be holding, and collecting its quarterly dividends, for a very long time. Stay off the bottom by drawing the line at 6.5%.
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.
Debt Ceiling Deal Keeps Monetary Policy Where It Belongs
Interest Rates Should Be Managed By Policy, Not Rating Agencies
Interest rates need to be managed as a matter of monetary policy. For better or worse, this task rests with the Federal Reserve. Had Washington failed to reach a settlement on the debt ceiling, it is likely that the Fed would have lost control, at least to a certain extent, of interest rates throughout our economy. Actions by rating agencies, as U.S. sovereign debt was subject to downgrades, would have been driving rates rather than deliberate policy actions.
While the Fed has little to show for its monetary policy decisions over the last few years, many would agree that having rating agencies and speculators driving the cost of money, at least for the short-term, would probably become untenable.
The debt ceiling settlement, signed into law on August 2, 2011, was a very significant event for preferred stock investors. Rate stability provides us with a more consistent environment within which we invest. While our high unemployment rate is unfortunate and needs to be dealt with, the lack of consumption-driven inflation has kept interest rates extremely low and stable. The debt ceiling settlement ensures that the low rate environment will continue for some time to come, probably through 2012.
There are dozens of high quality preferred stock issues to pick from for under $25 per share; annual average dividend yields are at about 7% (compared with about 1.25% for bank certificates of deposit); issuing companies are profitable and rates (along with preferred stock share prices) are expected to remain relatively stable for some time to come.
These are great times for preferred stock investors. I hope you are taking this opportunity to build your personal fixed-income portfolio with the highest quality preferred stocks available.
Thank you very much for your interest in my research. As always, 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 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) 2011 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.