“The information provided in the book has given me confidence to participate in preferred stocks. CDx3 has done the homework to help pick the best candidates!" Joe M., CDx3 Notification Service subscriber MORE>>
In This Issue...
Last Month's CDx3 Investor Results
New Fourth Edition of Preferred Stock Investing!
Amazon.com has Preferred Stock Investing ON SALE for $17.60
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).
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 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.
Preferred Stock Investing is one of the highest reader-rated books available at Amazon. Look for your copy of Preferred Stock Investing, Fourth Edition at your favorite online retailer.
The Last Month's CDx3 Investor Results article describes why the market prices of the highest quality preferred stocks available on U.S. stock exchanges finally softened on March 13, delivering welcomed relief for preferred stock buyers. The list of high quality issues that are available for less than $25 per share jumped from four to sixteen on that day. (jump to article)
The Special Announcement article explains how three criteria, when applied to the 1,000+ preferred stocks trading on U.S. stock exchanges, allow you to identify the highest quality issues. The table in this article takes the analysis a step further by itemizing 16 of these high quality issues that can be purchased today for a market price that is less than $25 (par). 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)
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 - "What price is used to calculate preferred stock dividends?" (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)
Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Mid-March Profit Taking Delivers Sub-$25 Prices For Preferred Stock Buyers
Number Of High Quality Sub-$25 Issues Jumps 4x
Much to the relief of risk-averse preferred stock buyers, the market prices of high quality preferred stocks finally came down during mid-March. Prior to March 13 there were only four high quality preferred stocks available on U.S. stock exchanges for a market price below $25 (their "par" value). That number has now risen to sixteen, providing substantially more choices to preferred stock buyers (see the Special Announcement article below for a list of this month's sub-$25 bargains and the definition of what makes a "high quality" preferred stock).
Buying preferred stock shares for less than "par" (usually $25 per share) is important to many preferred stock investors since doing so not only adds a layer of principal protection to your investment but also positions you for a downstream capital gain should the issuing company "call" (buy back from you) your shares. In the event of a call, shareholders receive the par value in cash for each share so purchasing for a price below par becomes important.
Figure 1 illustrates the squeeze that steadily increasing market prices for high quality preferred stocks had put on buyers during most of the first quarter. As market prices increased, the number of high quality issues available for less than $25 per share had steadily fallen, leaving many preferred stock buyers with few choices.
Preferred Stock "Buyer Bubble" Popped On March 13
In an unusual alignment of events, a large group of preferred stock shareholders were simultaneously pushed into the market as buyers during the first quarter. As last month's issue of the CDx3 Newsletter explained, this "buyer bubble" was caused by our current low interest rate environment.
Several companies have taken advantage of today's low rates by issuing a bumper crop of new lower rate preferred stocks and are using the proceeds from these new preferred stocks to call their older, more expensive issues. Eleven widely held, high quality preferred stocks were called during the first quarter of 2012. Holders of the retired preferreds suddenly and simultaneously became motivated buyers looking to replace their newly called shares.
The resulting "buyer bubble" pushed the number of high quality preferred stock issues available for a market price below $25 down to a scant four alternatives as illustrated in Figure 1.
But as the mid-March ex-dividend dates arrived, many shorter-term investors sold their shares, having collected the Q1 dividend cash. Because shorter-term preferred stock investors were driving the market, prices fell just after the mid-March ex-dividend dates passed. On March 13 the list of high quality preferred stocks available for less than $25 jumped from four to sixteen, creating several new opportunities for buyers.
Could April Bring Bargains For Buyers?
The passing of the mid-March ex-dividend dates of high quality preferred stocks led shorter-term shareholders to sell, pushing market prices down during the days that followed. That created sixteen great buying opportunities for preferred stock investors, so it is worth taking a look at what may be in store for April.
While it is not possible to know with certainty what the future market price of a preferred stock will be, there are some interesting indicators that savvy preferred stock buyers should be paying attention to. As I am about to explain, it appears that the shorter-term investors that created March's buying opportunities are still driving. Consequently, April is looking very much like a repeat of March where buyers will be treated to sub-$25 market prices for certain high quality preferred stocks in the days following April ex-dividend dates.
When longer-term preferred stock investors are buying, the average market price of the preferred stocks that they are purchasing will tend to climb by more than one quarter's worth of dividend income above par. It is not unusual to see long-term buyers pay two, three or even four quarters worth of dividend income above par ($25) since they are in it for the long haul and believe, for whatever reason, that a call is very unlikely for the foreseeable future.
But the opposite is also true if shorter-term investors take over as we saw happen during March. In that event, the market price of a preferred stock will tend to stay closer to only one quarter's worth of dividend income above $25. Generally, the closer the market price of a high quality preferred stock is to $25 plus one quarter's worth of dividend income, the more control shorter-term investors are exerting over longer-term investors.
Figure 2 lists the ten high quality preferred stocks that will have April 2012 ex-dividend dates. This list is sorted by the Ex-Div Date column (note that the issuing companies of the first four on the list have yet to declare their April dividends but are expected to do so within the next few days).
These are the preferred stocks that buyers should be watching as April unfolds.
Note that in order to protect the values of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) trading symbols are obscured here. If you are already a subscriber to the CDx3 Notification Service click the "Ex-Div This Month" HotList link on the CDx3 Notification Service website for a list of the high quality preferred stocks with April ex-dividend dates and current prices.
Shorter-Term Investors Are Still Driving
The average quarterly dividend paid by the high quality preferred stocks on this April list is $0.46 per share. The average market price: $25.49. Shorter-term preferred stock investors are still driving the April market for high quality preferred stocks, just like they were during March.
Take a look at PFD-A in Figure 2. This high quality preferred stock will pay a quarterly dividend of $0.42 to those holding shares on or about April 9, just a few days from now. On March 30 when this data was gathered, PFD-A was selling for $25.48 implying that shorter-term investors, who are only planning on continuing to hold their shares until they can collect one more quarter's dividend a few days from now, have more control than longer-term investors.
PFD-G presents another example. This high quality preferred stock reaches its ex-dividend a bit later in April (April 25) and also pays a $0.42 per share dividend. If longer-term investor were driving here we would see PFD-G's market price closer to $25.84 or so (two quarter's worth of dividend income above par). But with three weeks to go before its April 25 ex-dividend date, shorter-term investors are holding the price at $25.41 (one quarter's worth of dividend income above par).
So when we see the market price of a group of high quality preferred stocks with an approaching ex-dividend date start to approach one quarter's worth of dividend above par, a sell-off may be in the making just after the ex-dividend dates pass by. Just like what happened in a big way during March.
There is no way to know for sure what these prices will do as April unfolds, but savvy preferred stock buyers should be looking for sub-$25 buying opportunities as we pass the ex-dividend dates seen in Figure 2.
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 Fourth Edition is now 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.
Invest in the best. Subscribe to the CDx3 Notification Service (see reader comments) today.
UPDATED: This Month's Under $25 High Quality Preferred Stock List
16 High Quality Preferreds Available For Less Than $25 Per Share, 6.71% Average Yield
There are about 1,000 preferred stocks trading on U.S. stock exchanges. Of these, there are sixteen specific issues that are of particular interest this month (up from four last month). Not only are these the highest quality preferred stocks available (defined below) but they are providing an average annual dividend yield of 6.71% right now.
If that isn't enough, what makes these particular preferred stocks stand out this month is that they are selling for a market price that is below their $25 "par value." Buying your shares for less than par adds a layer of principal protection to your investment.
The marketplace for high quality preferred stocks is seeing a high number of new issues and also a high number of calls so far this year. When your shares are called by the issuing company, preferred stock investors are often looking for that next purchase in order to keep their cash working for them.
In the event that the issuing company retires (calls) the shares, shareholders will receive the par value ($25 per share) in cash from the company. By purchasing your shares for less than the par value ($25), you position yourself for a nice capital gain to pile on top of the great dividends that these high quality preferreds pay you in the meantime.
A special note this month: On March 18, 2012 we added a new type of fixed-income security to the CDx3 Notification Service database - Exchange Traded Debt Securities. ETDS are extremely similar to preferred stocks and are often listed as such by brokerage systems but they are actually lower-risk bonds (ETDS shareholders have seniority over the same company's preferred stock shareholders). ETDS's are shown in green font in our database and this month's bargain table provides our first example.
To protect the value of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service), trading symbols are obscured here. But here's how to find these high performers out of the 1,000+ available candidates.
Applying three simple criteria eliminates the pretenders and the risk and complexity that come with them, leaving us with just the highest quality preferred stocks:
Criteria #1 - Investment Grade: By limiting the choices to those preferred stocks with a Moody’s investment grade rating, we cut the list almost in half in one shot, down to about 600 issues. With 600 investment grade issues to pick from, most risk-averse investors would rather not fool around with “speculative grade” alternatives.
Criteria #2 – Cumulative Dividends: With common stocks, if the company decides not to pay a dividend, you’re out the money. But many preferred stocks have a “cumulative” dividend provision, meaning that if the issuing company misses a dividend payment to you, it still owes you the money downstream (its obligation to pay you accumulates). Limiting our choices to just cumulative dividend preferred stocks eliminates another 200 pretenders.
These two criteria (investment grade and cumulative dividends) are pretty easy for most risk-averse investors to warm up to. We are down to about 400 remaining candidates.
Criteria #3 – Minimum Rate of 6.5%: Historically, the highest quality preferred stocks carry annual coupon rates between 6% and 9%. Not too bad compared to the ~1.3% being paid by bank CDs. But rates go up and down over time and you want to be sure that you always have some breathing room if rates fall too far. A 6% preferred stock (i.e., the bottom of the barrel) can become harder to sell once rates start rising again and higher paying alternatives are introduced. Preferred stock investors can avoid this pitfall by simply sticking with preferreds that offer a fixed dividend rate of at least 6.5%, giving you time to sell once rates bounce off of 6% and begin heading back up. That takes us to about 150 remaining issues.
By applying all ten of the criteria from chapter 7 of my book, Preferred Stock Investing, and then focusing on just those that are available for less than $25 per share, we are left with the high quality issues that you see here. This list was generated in one mouse click using the Preferred Stock List(TM) software tool available to those subscribing to the CDx3 Notification Service (my preferred stock email alert and research newsletter service).
Please consider becoming a subscriber to the CDx3 Notification Service today.
Already a subscriber? The trading symbols of these high quality preferred stocks are listed on page 6 of the current issue of the subscriber's newsletter, CDx3 Research Notes. Or click on the "CDx3 Bargain Table" HotList on the CDx3 Notification Service website.
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.
What price is used to calculate preferred stock dividends?
Most preferred stocks offer a fixed dividend return as published in the prospectus. The long-term average annual declared dividend rate (called the "coupon rate" in reference to days gone by when investors had to tear off a coupon and present it in order to receive their dividend cash) for the highest quality preferred stocks is about 7%.
While there are a few exceptions, preferred stocks generally pay these dividends to shareholders each quarter. As the end of the quarter approaches, the company's board of directors meets and declares the key date that you must be a shareholder of record in order to receive the upcoming dividend cash. This date is referred to as the record date and is set by the issuing company. The day that the company declares the record date is called the declaration date.
But in order to allow for processing time, the stock exchange where the preferred stock trades needs a couple of days prior to the record date and will set their own cutoff date. This date, set by the stock exchange, is called the ex-dividend date. Whomever owns the shares when the market opens on the ex-dividend date will receive the upcoming dividend payment.
So the important dates each quarter, in order of occurrence, are the declaration date, the ex-dividend date and the record date. These are the key dates for determining who is going to receive the upcoming dividend. But since market prices fluctuate every day, the share price of a preferred stock will almost certainly be different on each of these dates and will also almost certainly be different from your original purchase price.
So when we say that a preferred stock pays a 7% annual dividend, to what are we referring? 7% of what?
The question this month for preferred stock investors:What price is used to calculate preferred stock dividends?
Your original purchase price (the amount you have invested)
(C) Liquidation price (usually $25.00 per share, also known as the "par" value)
The correct answer to this question is (C), the liquidation price.
The declaration date (date that the issuing company declares the record date), ex-dividend date (set by the stock exchange) and record date (set by the issuing company) occur prior to the actual dividend payment. The payment schedule for dividends throughout the year is specified in the issue's prospectus. For a preferred stock that pays quarterly dividends there will be four payment dates listed (usually in the prospectus section titled "Dividends" or "Distributions").
But if a payment date falls on a weekend, holiday or other non-business day the closest business day after the payment date is the date that shareholders will receive the actual dividend payment. The date of actual payment is called the distribution date.
And, for fixed-rate preferred stocks, the amount of that dividend distribution will be exactly the same every quarter, regardless of your original purchase price and regardless of the then-current market price. The dividend amount is calculated by multiplying the declared dividend rate (coupon rate) by the "liquidation price" which is usually $25.00 per share (for preferred stocks intended for individual investors).
For example, a preferred stock with an 8% declared dividend rate generates $2.00 per year in dividend income to the shareholder (8% x $25.00 = $2.00) per share. Dividing this annual amount by four gives you the quarterly dividend amount that will appear in your brokerage cash account on the distribution date, in this case $0.50 per share ($2.00 divided by 4 = $0.50).
This $25.00 value is referred to in the prospectus of a preferred stock as the "liquidation preference," an overly-confusing term that refers to what shareholders will ultimately receive in the event that the shares are liquidated (turned into cash) by the issuing company.
The issuing company can liquidate (buy back from you) your shares in two ways: (1) by retiring ("calling") the shares on or after the published call date (which usually occurs five years after the date that the preferred stock is first issued to the marketplace) or (2) allowing the security to reach its maturity date without having previously been called. In either event, the issuing company will liquidate your shares for a price equal to the liquidation preference amount as published in the prospectus.
In the meantime, each quarterly dividend will be calculated using the liquidation preference amount and paid to you on each distribution date as published in the preferred stock's prospectus.
Preferred Stock Market Research Now Available All Month Long - Free
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Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month.
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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) 2012 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.