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|In This Issue...|
For New Readers...
Welcome to all of the new CDx3 Newsletter readers who signed up over the last month. This is your first issue of the CDx3 Newsletter, a free monthly newsletter devoted to the interests of CDx3 Preferred Stock investors.
To be sure that you continue to receive the CDx3 Newsletter each month, please remember to add the following email address to your email address book safe sender list:
What Is A "CDx3 Preferred Stock?"
CDx3 Preferred Stocks are regular preferred stocks that are able to meet the ten selection criteria described in chapter 7 of my book, Preferred Stock Investing.
Applying the CDx3 Selection Criteria eliminates the pretenders, leaving just the highest quality issues.
For example, here are three of the ten CDx3 Selection Criteria:
1. be issued by a company with a perfect record of never having suspended a dividend on a preferred stock;
2. have the "cumulative" dividend requirement, which means that in the unlikely event that the issuing company misses a dividend payment to you, they have to make it up to you later; they still owe you the money; and
3. be rated "investment grade" by Moody's Investors Service.
Having specific and consistently applied selection criteria takes the emotion out of your investing decisions and leaves you with the highest quality preferred stocks - "CDx3 Preferred Stocks."
This month's High Quality Preferred Stocks 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 7 of these high quality issues that can be purchased today for a market price that is less than $25 (par). (jump to article)
The Preferred Stock News article looks at historical data to answer a common question currently on the minds of preferred stock investors: If I invest in today's high quality preferreds stocks, offering an average annual yield of 6.8%, how much do I need to worry about a future increase in interest rates wiping out my gains? (jump to article)
The Special Announcement article explains how you can now have continuing preferred stock research delivered to you for free. 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. (jump to article)
The Preferred Stock Facts article is presented both here and on the Preferred Stock Investing Reader's Forum. Test your knowledge by clicking on any preferred stock question to see the multiple-choice answers. You will receive an automatic email that provides you with the correct answer and my explanation. (jump to article)
In the Free Special Offer article I offer to provide you with some of the research from my book, Preferred Stock Investing, Fourth Edition. I am making it available to brokers, financial planners and investment groups for 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.
This Month's Under $25 High Quality Preferred Stock List
7 High Quality Preferreds Available For Less Than $25 Per Share, 6.63% Average Yield
There are about 1,000 preferred stocks trading on U.S. stock exchanges. Of these, there are seven specific issues that are of particular interest this month. Not only are these the highest quality preferred stocks available (defined below) but they are providing an average annual dividend yield of 6.63% right now (May 29, 2012).
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 redeems (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.
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 ~1.1% 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.
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 today.
How Afraid Should You Be
Of Increasing Interest Rates?
Preferred stock investors are rightly concerned that when interest rates start going up (2015?), the market prices of their preferred stock shares will go down. Interest rates and the market prices of fixed-income securities (bonds, preferred stocks) tend to move in opposite directions.
But on the upside, high quality preferred stocks are currently offering one of the best returns available. Today's fixed-income alternatives look something like this:
- Bank Certificates of Deposit
(national average, 24 month APY): 1.1%
Taxes and inflation wipe out the first two.
If you avoid investing in high quality preferred stocks at today's 6.8%, are you making the right call? How much would future prices have to drop anyway, and how likely is that?
Rate Increase in 2015 (?)
The Federal Reserve has announced several times that it is not going to be raising interest rates until at least late-2014. That's at least ten quarters from now. By investing at today's average dividend rate of 6.8% for the next ten quarters you will earn $4.25 per share in dividend income.
Should preferred stock investors walk away from today's 6.8% for fear that a future interest rate increase will lower prices enough to wipe out their gains?
Let's take a look at what happened to high quality preferred stock market prices the last time the Federal Reserve started increasing interest rates (namely, the federal funds rate).
Before jumping into this analysis, it is important to note that the relationship between the federal funds rate and preferred stock market prices is not a perfect one. There are a multitude of "costs of money" at various levels within the U.S. economy that are each affected by a variety of circumstances, events, policies and other cross-currents (domestic and foreign).
We have to look no further than the recent Global Credit Crisis (2007 - 2009) for an exception to the usual inverse relationship between interest rates and preferred stock market prices (rates down, prices up and vice versa). During the crisis, the Fed lowered the federal funds rate to zero but, for much of this same period, preferred stock market prices dropped as well.
But for this analysis, the federal funds rate suits our purposes fairly well since this is the rate that investors are watching and will react to in the event of a change (or even the announcement of a pending change) probably more so than any other single rate.
Study Period: July 2004 through June 2006
The idea here is to find a recent period that is arguably comparable to today's circumstances where the Fed increased the federal funds rate, and then see what happened to the market prices of high quality preferred stocks during that period.
July 2004 through June 2006 provides an excellent study period. Going into this period, the average dividend rate being offered by high quality preferred stocks was 6.8% (same as today); the federal funds rate was at a historically low level and had been there for a long time (also similar to today); the Fed started increasing rates for the policy objective of holding off inflation as the post-9/11 economy recovered (which is likely to be the same policy reasoning come 2015); and they did so in very minor 0.25% increments that were announced in advance as to not introduce an unwanted shock (which is also likely to be the case come 2015).
As illustrated in Figure 1, beginning in July 2004, under Chairman Alan Greenspan, the Fed gradually and very steadily increased the target federal funds rate for 24 straight months. Beginning at 1%, the federal funds rate was increased to 5.25% twenty-four months later with no breaks in between. Because of this consistent, steady and prolonged rate increase, preferred stock market price data from this period is nearly pristine.
Preferred Stock Market Prices
So what happened to preferred stock market prices the last time the Fed started increasing rates?
Figure 2 shows the monthly average market price of high quality preferred stocks during the same period, July 2004 through June 2006.
Interestingly, preferred stock market prices actually increased for several months when the Fed started raising rates in July 2004 (perhaps because the rate increase was not as significant as investors had feared).
Also note that, while prices definitely dropped over this period of increasing rates, they did not fall below their $24.81 starting point until October 2005, fifteen months after the Fed started increasing rates.
The result of this significant increase in the federal funds rate was an $0.82 per share drop in the average market price of high quality preferred stocks (from $24.81 to $23.99).
Preferred stock investors who chose to purchase high quality preferred stock shares going into this study period had earned an average of $2.55 in dividend income 24 months later. These investors gave up $0.82 in value to gain $2.55 in dividend income over the study period.
Back To Our Original Question
So back to our original question: If you avoid investing in high quality preferred stocks at today's 6.8%, are you making the right call? How much would future prices have to drop anyway, and how likely is that?
Because we are talking about the future here, the short answer is that there is no way to know for sure. It is hard to say how meaningfully past events will apply to the future.
But remember that just as the direction of interest rates and preferred stock prices are related, the same is true of magnitude. Minor and gradual rate changes tend to have a minor and gradual impact on prices.
Once the Fed starts raising interest rates, do you think it is more likely the any such increase will be (a) huge, sudden and unannounced or (b) minor, gradual and announced in advance as to avoid shocking what is sure to be a fragile economy coming out of recession?
Assuming that future rate increases are more likely to be minor and gradual, it is doubtful that a resulting price drop would be major and sudden.
To the extent that we can apply our study period to a 2015 rate increase, it seems unlikely that a 2015 rate increase would erode market prices enough to offset the $4.25 per share in dividend income that preferred stock investors will collect between now and then.
 "High quality" preferred stocks are those that meet the ten risk-lowering selection criteria from chapter 7 of my book, Preferred Stock Investing. For example, high quality preferred stocks have investment grade ratings and the cumulative dividend requirement.
 A 6.8% preferred stock with a standard par value of $25 pays a dividend of $0.425 per quarter (($25 x 6.8%) /4). $0.425 per quarter for ten quarters is $4.25 per share in dividend income. All such values used throughout this article are per share.
 While this is the best and most recent period to compare, keep in mind that there are significant differences between the preferred stock market as it existed then versus today. For instance, Big Bank trust preferred stocks (TRUPS) dominated the offerings then. But due to the January 1, 2013 implementation of Section 171 of the Wall Street Reform Act, that will not be the case come 2015.
 Source for all preferred stock data in this article: CDx3 Notification Service database, TDAmeritrade, Preferred Stock Investing, Fourth Edition. The CDx3 Notification Service is my preferred stock email alert and research newsletter service including data for all preferred stocks and Exchange Traded Debt Securities traded on U.S. stock exchanges.
 Chapter 15 of Preferred
Stock Investing, Fourth Edition itemizes every high quality
preferred stock that has been issued since January 2001. High
quality preferred stocks used for this price analysis were taken
from the chapter 15 tables.
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.
To receive articles by email automatically without having to visit the Forum, click here
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Please accept my invitation to receive articles by email and visit the Forum.
Test Your Knowledge With These Preferred Stock Facts!
There's a lot to like about preferred stocks. And many aspects of selecting, buying and selling the highest quality issues are misunderstood. Here are a few frequently asked questions that illustrate some of the more subtle points of preferred stock investing.
Clicking on any of the below questions will open a new window on your screen. Each question is presented with multiple-choice answers. Test your knowledge by submitting your best guess and I will automatically email you my analysis with the correct answer (and no spam, ever).
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.
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.