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2010 Update to Preferred Stock Investing!
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.
Get the 2010 update to Preferred Stock Investing!
And I am also happy to announce that as a special service to readers, the 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 2010 update to the book would not have been complete without wrapping up the method's performance during these historic (extreme) conditions.
Specifically, the 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. To receive the free 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). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free 2010 update.
Just Posted On The Preferred Stock Investing Reader's Forum: The weakness in our economy is due to lack of confidence more so than lack of cheap cash. Having completed its second month of implementation, the initial results of the Federal Reserve's QE2 program, designed to lower the yields of treasuries with 2.5 to 10-year durations, are presented in a December 29 posting to my blog titled "Preferred Stock Investors Ignore Fed's QE2." The chart illustrates how the Fed's new program has yet to achieve its intended results and how preferred stock investors have thus far remained entirely unaffected by this massive and unprecedented program. (jump to Forum)
The Last Month's CDx3 Investor Results article identifies a specific event, three years in the making, that has put five specific preferred stocks, issued by one company, in the spotlight. In one of the largest real estate deals in recent memory, a 75 year old real estate development company just inked a construction deal worth half a billion dollars. This same company has assets that nearly double its liabilities including about one billion dollars in cash. Five of the highest quality preferred stocks on the planet are issued by this outfit and are currently offering an average annual dividend yield of 7.12% to preferred stock investors. (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 subscriber's 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 identifies eighteen of the highest rated, highest quality trust preferred stocks. 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 focus on Wells Fargo & Company, a $165 billion financial institution founded in 1852 as a safe place to store California gold. Wells has a very colorful history which it proudly displays in its Wells Fargo museums placed around the country. Just as unique was its role as one of the initial nine TARP banks and its resulting acquisition of Wachovia. (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 - "Why are preferred stocks considered lower risk than the same company's common stock?" (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: If Jan Hatzius, chief U.S. economist at Goldman Sachs, has it right, preferred stock investors can count on continuing to earn about 7% in dividend returns and stable market prices for another two years. As described in the Next Month's Sneak Peek article, in a January 3, 2011 CNBC interview Hatzius explains why the Federal Reserve is unlikely to raise the federal funds rate or add to the recent QE2 program until at least 2013. (jump to article)
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Half Billion Dollar Deal Highlights Five Specific Preferred Stocks
All Investment Grade With Cumulative Dividends, Average Yield 7.12%
An event occurred during December that brings five specific preferred stocks, currently providing a yield of 7.12%, to the top of the opportunity list for preferred stock investors. These are just the sort of circumstances that preferred stock investors are interested in but frequently find too time consuming to dig out.
One of our largest real estate development companies closed a deal worth nearly half a billion dollars that they have been angling for since 2007. And that's just the construction budget. The contract also includes additional consideration for the ongoing operation of the resulting facility and its infrastructure.
Take a look at Table 1. This is their Balance Sheet ending September 31, 2010. This company's assets almost double its liabilities and those assets include about $1 billion in cash plus another billion in accounts receivable.
Looking at the data for the last four quarters you can also see that this is not the exception; this is how management runs this business and has for a long time (this company was first incorporated in 1936).
Five Of The Highest Rated Preferred Stocks Are From This Company
This company is also the issuer of five of the highest rated preferred stocks on the planet, all currently trading for under $25 per share (more on why this is critically important in a moment). As itemized in Table 2, these five investment grade preferred stocks are offering an average annual dividend yield of 7.12% right now. (Note that to protect the value of subscriptions to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, actual trading symbols are omitted here).
These five issues all carry the 'cumulative' dividend provision as well. That means that in the unlikely event that the issuing company has to skip a dividend payment to you (which has never happened with this company) they still owe you the money. With cumulative dividend preferred stocks the issuing company's obligation to pay you accumulates.
$25.00 per share is a magic value for investors looking to add an additional layer of protection between risk and their invested principal. Five years after a new preferred stock is issued the issuing company regains the right to purchase your shares back from you. If they do so, they must pay you $25.00 per share. So by purchasing your shares for less than $25.00, you not only help protect your principal but you also position yourself for a nice capital gain in the event the issuing company retires the shares in the future (see the Special Announcement article below to read about how preferred stock investors can use this technique right now with Big Bank-issued preferred stocks courtesy of the new Wall Street Reform Act).
As shown in Table 2, all five of these preferred stock issues are currently available for less than $25.00 per share.
Get More For Your Money
Over time it is not unusual for the same company to issue multiple "series" of preferred stocks, each with its own prospectus provisions, characteristics and dividend rate. The five that you see listed here are very similar and were all issued not only by the same company but within twelve months of each other.
Preferred stock buyers and sellers will tend to price similar preferred stocks from the same company such that the return (the "yield") is about the same. Looking at Table 2, notice that the average yield of these five issues is 7.12%.
Notice that PFD-B is priced too high at the moment. At $23.56 per share, PFD-B provides a yield of 7.03%. Given that these five high quality preferreds are issued by the same company, are nearly identical and are almost the same age, buyers are getting more for their money with the other four issues. PFD-A and PFD-C are particularly attractive as these two preferreds have been slightly under priced by the market, a condition which is always temporary.
Lower Risk, Higher Reward
The foreseeable future of this company appears to be very encouraging, especially for preferred stock investors. This company's common stock dividend provides a current dividend yield of only 3.2%. That's less than half of the 7.12% average being paid by this same company's preferreds.
The irony is that, since preferred stockholders get to stand in line in front of common stock holders in case of a disaster (hence the name "preferred"), the investment risk associated with these five preferred stock issues is less than that associated with this company's common stock. And that's before you consider the investment grade ratings and the cumulative dividend obligation that these five preferred stock issues also provide to investors. A rare example of higher returns at lower risk.
Subscriber's to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, can read more about this company, their new big deal and see the trading symbols for these five high quality preferred stocks in the current (January 2011) issue of the subscriber's newsletter, CDx3 Research Notes. The January 2011 issue of CDx3 Research Notes includes four pages of research on these five preferred stocks and how subscriber's to the CDx3 Notification Service can keep a close eye on them and their performance using a new tool just launched on the subscriber's exclusive website.
The extent to which these preferred stocks are consistent with your individual risk tolerance, financial resources and goals is a decision that only you can make. But this is just the sort of opportunity that piques the interest of many preferred stock investors.
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.
UPDATED: This Month's Under $25 Trust Preferred Stock List
These 18 Preferreds Will Be Among The First To Come Under The Wall Street Reform Act
This month there are 18 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 creates the largest single opportunity for preferred stock investors in history (how's that?). And like most investments, the highest returns will tend to favor those who get in earlier rather than later.
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.
Buying your shares for less than $25 provides a layer of protection for your principal.
The far right column of this table shows you the effect that adding a capital gain onto the regular quarterly dividend income has on your Effective Annual Return...courtesy of the U.S. Government.
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: 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?
Wells Fargo & Company (NYSE: WFC)
If you've never been to a Wells Fargo museum you're missing out on a unique glimpse of U.S. history. Founded in 1852 as a safe place to put California gold, Wells Fargo has grown to a $165 billion financial powerhouse, still headquartered in San Francisco.
In October 2008, the bank was one of the original nine TARP banks that were required to volunteer to accept $25 billion each, ostensibly, so goes the rumor, to provide cover for Citi. While objecting, Wells took the TARP cash to the delight of financial analysts. After having done their part to prevent a global run on Citi, Wells repaid Treasury a year later.
Wells is one of the most watched and analyzed banks in the world with no fewer than 28 financial analysts scrutinizing its every move. Since the financial system recovery in early 2009, these analysts have provided the company with a string of upgrades. Wells is consistently mentioned among the most favored and well run financial institutions in the world.
During the financial crisis (2007 - 2009) we saw stronger banks acquire their weaker competitors for, in many cases, bargain basement prices. JP Morgan and US Bancorp proved particularly nimble and have both benefited accordingly. On January 1, 2009, Wells, for their part, completed their acquisition of Wachovia. Too frequently such acquisitions run into rough water due more to cultural and leadership friction than anything more material. In a testament to both organizations, Wells earned the highest American Consumer Satisfaction Index score in customer satisfaction among Big Banks. The study, conducted by the University of Michigan Ross School of Business, is published every quarter with these most recent results being announced on December 14, 2010.
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.
Why are preferred stocks considered lower risk than the same company's common stock?
As pointed out in the beginning of my book, Preferred Stock Investing, all investment strategies have two assumptions in common - (1) that the entity being invested in remains a going concern and (2) investing is no place for next week's grocery money.
Preferred stock investing is no exception. Our returns are paid to us by the issuing company and, since market prices go up and down repeatedly over time, you do not want to be in a position of being forced to sell when prices are lower than when you made your original purchase.
And investment risk is often very difficult to quantify. That is, it can vary from one investor to the next. What is acceptable risk to one investor may be unacceptable to another. But for some very specific reasons, the same company's preferred stocks generally carry less investment risk than their common stock.
The question this month for preferred stock investors:Why are preferred stocks considered lower risk than the same company's common stock?
Preferred stockholders get paid their dividends before common
(C) Preferred dividend payments are less tied to quarterly profits
(D) Common stocks have no par price below which principal is more protected
(E) All of the above
The correct answer to this question is (E), all of the above. Let's take them one at a time.
Preferred stockholders get paid their dividends before common stockholders: This is why they are called "preferred" stock; preferred stock shareholders have preferred status over common stock shareholders. A company cannot pay their common stock shareholders one dime in dividends until all preferred stock dividends have been paid out.
Prices are less volatile since the dividend is known in advance: Market price fluctuations are caused by speculation; the more unknowns, the more speculation. Since the dividend paid on a company's common stock (if any) can vary every quarter, there is substantial speculation at all times. Preferred dividends are generally of a fixed amount and are known in advance so preferred stock market prices are generally less volatile.
Preferred dividend payments are less tied to quarterly profits: Common stock dividends are a distribution of quarterly profits, if any, to shareholders. Preferred dividend payments are generally reserved in advance since the amount is known and are therefore more closely tied to the company's cash flow than to quarterly profits.
Common stocks have no par price below which principal is more protected: Preferred stocks can be "retired" by the issuing company. To do so, the company must buy the preferred stock shares back from shareholders at a pre-declared price called the "par value" (usually $25 per share). Investors can therefore reduce the risk of principal loss by always purchasing their shares for a market price less than the par value. Common stocks have no such provision (and no such "built-in buyer").
While my book, Preferred Stock Investing (now in its third edition), describes a variety of reasons why many investors find preferred stock investing more attractive than common stocks, these four risk reduction aspects of preferred stocks are particularly compelling. Add to that their long-term average annual dividend yield of about 7% (compared to 4% for common stocks over the last century, closer to 2% since 1990) and, for many investors, the case for preferred stocks becomes hard to ignore.
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.
No Interest Rate Changes For Two More Years - Chief U.S. Economist Explains
7% Yield And Stable Prices To Continue For Preferred Stock Investors
As a new year gets underway preferred stock investors find themselves once again wondering when the Federal Reserve is going to start raising interest rates. Historically, the direction of the federal funds rate and the yield being generated by other fixed-return investments (such as preferred stocks) tend to move together.
While the 7% yield currently being provided by the highest rated preferred stocks is attractive to many, an increase in the federal funds rate could produce a yield uptick for preferred stock investors. But if Jan Hatzius, chief U.S. economist at Goldman Sachs, is right, preferred stock investors will be enjoying their 7% dividend returns for another two years.
In a January 3, 2011 CNBC interview Hatzius says that the Federal Reserve is unlikely to increase the federal funds rate until 2013. He goes on to say that until employment picks up (which no one is expecting any time soon), we should not be too concerned about inflation either.
While 2010 saw a return to normal for preferred stock investors, 2011 could be a year of stability if Hatzius has it right. After having successfully threaded the needle through the financial crisis, a steady 7% return and stable prices is starting to sound like something to look forward to.
Opportunities that preferred stock investors should keep an eye on going into 2011: instability in the municipal bond market, China monetary policy, healthcare legislation changes and what the Fed does, if anything, about QE2 as we approach summer.
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 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
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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) 2011 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.