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See the new Fifth Edition of Preferred Stock Investing at Amazon!

   
 

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In This Issue...

High Quality Preferred Stocks

Preferred Stock News

Special Announcement

Preferred Stock Facts

FREE Special Offer

   
 

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:

CDx3NotificationService@us.emaildirect.com.

 


Quick Summary

This month's High Quality Preferred Stocks article describes how the market for the highest quality preferred stocks now favors buyers. Of the twenty-five high quality preferred stocks selling for a sub-$25 market price, five offer a dividend of at least 7 percent. Out of the 938 preferred stocks and exchange-traded debt securities that were trading on U.S. stock exchanges at the end of October 2013, our preferred stock search engine found 25 specific high quality issues selling below their $25 par value. (jump to article)

The Preferred Stock News article explores how the LIBOR manipulation scandal affects preferred stock investors. Preferred stock investors holding shares of variable rate preferred stocks using the LIBOR rate to pay dividends between 2005 and October 2008 may have been cheated out of millions in dividend income. If you fancy variable rate preferred stocks, check your holdings for the period January 2005 through October 2008 for any shares you may have held of the 23 securities identified in the article. The 485.9 million shares held by preferred stock investors during this period were almost certainly paid dividends that were short of what was due. (jump to article)

The Special Announcement article announces the availability of the all new 5th Edition of my book, Preferred Stock Investing. The new Fifth Edition of Preferred Stock Investing started shipping in July. I update the book every other year with the most recent preferred stock research, focusing on the conditions that preferred stock investors are expected to be facing (upward pressure on rates). Learn to screen, buy and sell the highest quality preferred stocks. (jump to article)

The Preferred Stock Facts article is presented both here and on the PreferredStockInvesting.com website. 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)

The Free Special Offer 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 my blog and make them available to you 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.

Doug K. Le Du

I am a preferred stock researcher and author of the book titled Preferred Stock Investing. I am also a syndicated writer for the popular investing venues Seeking Alpha and Motley Fool. I publish three monthly newsletters that describe my ongoing preferred stock research. One newsletter, titled Preferred Stock List, is published by PortfolioChannel.com while the other two newsletters (CDx3 Newsletter and CDx3 Research Notes) are published by me directly to my readers/subscribers.

My academic background is in economics and statistics. I retired from my position as Managing Director at one of the world's largest management consulting firms in 2002 to focus on preferred stock research. I do not sell preferred stocks nor am I a stock broker or financial adviser. As a researcher, I research the market price behavior of the highest quality preferred stocks and write to you about my observations.

 

   
 

25 Investment Grade, 6.5+ Percent Cumulative Preferreds Available Under $25

Preferred Stock Search Engine Finds These 25 Out of 938 Alternatives

With a sub-$25 average price, the market for the highest quality preferred stocks now favors buyers. Of the twenty-five high quality preferred stocks selling for a sub-$25 market price, five offer a dividend of at least 7 percent.

As rates and prices move up and down over time, buyers buy when rates increase and prices fall below par ($25 per share in this case). Sellers sell those shares when rates fall again, pushing prices back above their original purchase price, enjoying 7 percent (long-term average) dividends in the meantime.

This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

I define 'high quality' here as securities that are able to meet all ten of the CDx3 Selection Criteria from my book, Preferred Stock Investing. These ten selection criteria have not changed since the first edition of the book was published in 2006.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, pay a minimum annual dividend of at least 6.5 percent, have cumulative dividends and offer investment grade ratings from Moody's Investors Service.

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.

Figure 1 shows the complete filter used to find these gems. Of the nineteen parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.

In addition to finding the highest quality issues that are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. Setting the "Dividend rate at least" parameter (center left under the Dividends heading) to 6.500 eliminates securities with very low, variable or adjustable dividend rates. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.

Figure 2 shows the results when this search is applied to our Preferred Stock ListTM database (please note that to protect the values of subscriptions to the CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 6 of the November 2013 issue of the subscriber's newsletter, CDx3 Research Notes, that you received on October 30 for symbols.

There were a total of 938 preferred stocks and ETDs trading on U.S. stock exchanges as October 2013 came to a close. Of these 938, 25 specific high quality issues are trading below their $25 par value (October 29, 2013 prices). This list is sorted by dividend rate (coupon) with the highest payers listed first.

The eight securities shown in green font are ETDs (bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining 17 securities listed are preferred stocks. All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's (the Moody's column).

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.

Please consider becoming a subscriber to the CDx3 Notification Service today.

Already a subscriber? The trading symbols for this example are provided on page 6 of the November 2013 issue of the subscriber's newsletter, CDx3 Research Notes.

 

Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks

Preferred Stock Investing is one of the highest reader-rated books in the United States with 68 reviews posted at Amazon.

A new edition of Preferred Stock Investing is published every other year in order to keep up with current market trends and research. The new Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are expected to face throughout the remainder of 2013 and 2014 (upward pressure on rates).

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. The Fifth 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 whenever a new preferred stock or exchange-traded debt security is introduced. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the Preferred Stock ListTM database 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1

Preferred Stock Search Engine

INVESTMENT GRADE, CUMULATIVE DIVIDENDS,

CURRENTLY PRICED BELOW $25 PAR

 

Source: CDx3 Notification Service, www.PreferredStockInvesting.com

 

Click To See Bigger Screen Sample

 

 

 

 


 

Figure 2

The 24 Highest Quality Preferreds

PRICED BELOW $25 PAR (October 29, 2013 prices)

 

Source: Preferred Stock List(TM), PreferredStockInvesting.com

 

Subscribe For Trading Symbols

 

(Already a subscriber? For actual symbols see page 6 of the November 2013 issue of the subscriber's newsletter, CDx3 Research Notes).

 
   
 

LIBOR Manipulation Scandal Cheated Preferred Stock Investors

Underpaid: At Least 319 Dividend Payments from 23 Preferred Stocks

Preferred stock investors holding shares of variable rate preferred stocks using the LIBOR rate to pay dividends between 2005 and October 2008 may have been cheated out of millions in dividend income. Those following the preferred stock investing method described in my book, Preferred Stock Investing, were able to side-step this building disaster since selection criterion #1 restricts selection to only those preferred stocks offering a known, fixed rate of return. But it is starting to look like others were not so lucky.

International bank investigators added Rabobank to the list of international banks guilty of manipulating the London Inter-bank Offered Rate (LIBOR) last week, fining the Dutch lender $1 billion for their part.

We got our first wind of what became known as the LIBOR manipulation scandal during the summer of 2012. The interest rate on trillions of dollars of a wide variety of contracts and securities, including variable rate preferred stocks, consumer loans and mortgages, is pegged to the LIBOR. Similar to the federal funds rate in the U.S., the LIBOR is the rate that European banks charge each other for overnight cash loans.

The LIBOR rate that a bank pays is seen as a statement about the bank’s stability, the stronger the bank the lower the rate it has to pay for such cash. As international banking investigators have now exposed, several of those charged with reporting the rates that determined the LIBOR have been fudging the rate downward since 2005, making their bank look stronger than it really is (and pushing the LIBOR lower than it should have been).

Focused on over a dozen banks that are surveyed to set the LIBOR, investigators have also nabbed Barclays, UBS and the Royal Bank of Scotland so far with fines now totaling more than $3.6 billion.

The investigation into the LIBOR scandal is still underway so the extent of the rate manipulation is still unknown. But based on what has been reported so far, the dividends paid to LIBOR-based variable rate preferred stock shareholders between 2005 and October of 2008 appear to have been underpaid.

How Rates are Set

There are four primary methods used by variable rate preferred stocks to set the dividend rate paid to shareholders: (1) LIBOR-based, (2) CMT-based, which use the constant maturity bond rate of certain U.S. treasuries, (3) inflation-based, using the Consumer Price Index and (4) fixed-to-floating, which offer a fixed dividend rate until the security’s call date, then a variable rate thereafter.

The LIBOR-based method is the most common. Variable rate preferred stocks that use the LIBOR-based method will usually reset the dividend rate each quarter by adding some amount to the three-month LIBOR published at the time (unless the LIBOR is real low, then a minimum rate kicks in).

Figure 3 shows the three-month LIBOR rate since 2004 with the manipulation period in question highlighted.

The minimum rate provision usually kicks in when the three-month LIBOR falls below about 2.5% so most dividends paid after October 2008 were based on the minimum rate provision rather than the LIBOR. So the actual “manipulation period” where a phony LIBOR rate affected shareholders is between 2005 through October of 2008.

Data for LIBOR-based variable rate preferreds that are no longer trading is hard to come by, but research to identify the securities that might be affected resulted in 23 specific securities that are still trading. These 23 were introduced prior to 2008, base their dividends on the three-month LIBOR rate and were paying dividends to shareholders during the manipulation period.

Press coverage of the LIBOR scandal has not mentioned how much the LIBOR rate was manipulated by but during the manipulation period a monthly change of 0.1% was not unusual. Using this value as a benchmark, we can start to get an idea of the magnitude of the underpayment of dividends to shareholders if the LIBOR was fudged downward by 0.1%.

Example: $11 million for BML-H Shareholders

BML-H, still trading today, is a 40.8 million share variable preferred issued by Merrill Lynch (now Bank of America) on March 9, 2005. BML-H paid 14 quarterly dividends during the manipulation period. The dividend rate, specified in the security’s prospectus, is set at 0.65% above the three-month LIBOR, but not less than 3.0%, and adjusts each quarter. Using that formula with the manipulated LIBOR published at the time, BML-H paid $181.79 million in dividends to shareholders during the manipulation period.

If, however, the LIBOR during this period was actually 0.1% higher than the manipulated value that was actually used for dividend payments, BML-H shareholders would have received $193.08 million, an additional $11.29 million.

Details, details

This analysis uses a variety of assumptions to estimate how much preferred stock investors would have been shorted if the LIBOR was reported to be 0.1% lower than it actually should have been.

Using that assumption, shareholders of the 23 still-trading securities listed in Figure 4 appear to have been shorted by about $50 million during the manipulation period. Once more details become known and more precise calculations can be made, the damage done to preferred stock investors by the LIBOR manipulation scandal will likely be much greater.

If you fancy variable rate preferred stocks, check your holdings for the period January 2005 through October 2008 for any shares you may have held of these 23 securities. The 485.9 million shares held by preferred stock investors during this period were almost certainly paid dividends that were short of what was due.

 


More Preferred Stock Research

FROM DOUG K. LE DU

Click any headline

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 3

 

 

 

 

Figure 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   
 

Fifth Edition of Preferred Stock Investing is Now Shipping!

Learn How to Screen, Buy and Sell the Highest Quality Preferred Stocks

Preferred Stock Investing is one of the highest reader-rated books in the United States with 68 reviews posted at Amazon.

A new edition of Preferred Stock Investing is published every other year in order to keep up with current market trends and research. The new Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are expected to face throughout the remainder of 2013 and 2014 (upward pressure on rates).

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The preferred stock market is finally starting to return to a market favoring buyers - higher dividend income available for lower prices. The new Fifth Edition has 21 chapters organized into six Parts over 334 pages.

Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).


 

 

Figure 5

Average Effective Annual Return

USING THE CDx3 INCOME ENGINE (2001 - 2012)

 

Chapter 17 provides the investing results for every qualifying preferred stock issued since January 2001

   
 

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).

 


 


 

 

 

   
 

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

 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.

Please accept my invitation to receive articles by email and visit the Forum 


 

 

   
   

Learn to screen, buy and sell the highest quality preferred stocks by purchasing the new Fifth 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 offer the CDx3 Notification Service (see reader comments).

Chapter 17 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.

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 sign up for this free monthly preferred stock research newsletter at www.PreferredStockInvesting.com. 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) 2013 by Del Mar Research, LLC.

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 Del Mar Research, LLC.  All rights reserved.

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 Del Mar Research, LLC, are solely responsible for your own investment decisions.