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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.
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This month's High Quality Preferred Stocks article lists the six highest quality preferred stocks that are selling for a sub-$25 market price and offering income investors an average current yield of at least 6.5 percent. Out of the 913 preferred stocks and exchange-traded debt securities that were trading on U.S. stock exchanges at the end of July 2014, our preferred stock search engine found six specific high quality issues selling below their $25 par value. (jump to article)
The Preferred Stock News article examines the preferred stocks offered by mortgage REIT, AG Mortgage Investment Trust. AG Mortgage preferred stocks offer cumulative dividends and current yields exceeding eight percent with the principal protection that comes with sub-$25 prices. The value erosion of this mREIT's common stock that will come with a future rate increase may be reason enough for value investors to consider the company’s preferreds. (jump to article)
The Special Announcement article announces the acquisition of PreferredsOnline (ePreferreds.com) by Del Mar Research, LLC, the parent company of the CDx3 Notification Service. The acquisition of the eleven year old PreferredsOnline service was completed on August 1, 2014. (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.
6 Investment Grade, 6.5+ Percent Cumulative Preferreds Available Under $25
Preferred stock search engine finds these six out of 913 alternatives
The six highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.5 percent current yield in today's preferred stock marketplace.
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 seven 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.
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 6.0 percent, have cumulative dividends and offer investment grade ratings from Moody's Investors Service.
Currently priced below par
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 6.000 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 August 2014 issue of the subscriber's newsletter, CDx3 Research Notes, that you received on July 28 for symbols.
There were a total of 913 preferred stocks and ETDs trading on U.S. stock exchanges as July 2014 came to a close. Of these 913, six specific high quality issues are trading below their $25 par value (July 25, 2014 prices). This list is sorted by dividend rate (coupon) with the highest payers listed first.
The two securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining four 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 August 2014 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 76 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 2014 and 2015.
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.
AG Mortgage Preferred Stocks worth a Look for Common Stock Investors
AG Mortgage preferreds offering cumulative dividends, eight percent yield, sub-$25 prices
AG Mortgage Investment Trust (NYSE: MITT), a mortgage real estate investment trust (mREIT), has a $535 million market cap with two preferred stocks currently trading on U.S. stock exchanges. These traditional preferred stocks, neither of which are rated by either Moody’s or Standard & Poor’s, are offering an average current yield of 8.23 percent (July 22, 2014).
Description and history
Just three years old, MITT was founded in 2011 and is headquartered in New York City. Like all mREITs, MITT attempts to make money by using low-cost funds to buy securities that pay a higher return, the spread being referred to as Net Interest Margin (NIM).
The low-cost funds that mREITs use to buy higher-paying securities typically come from lenders who provide cash to the mREIT in exchange for securities and an agreement (called a “repurchase agreement” or repo) that the mREIT will buy the securities back from the lender on a future date and at a specified price. Repo lenders retain the right to demand immediate repayment (a “margin call”) or can seize the collateral backing the securities if the mREIT is unable to meet the buy-back conditions of the agreement.
The higher-paying securities that mREITs buy with the borrowed cash favor those that a U.S. government agency (such as Fannie Mae or Freddie Mac) guarantees and are referred to as “agency” securities. Agency securities are backed by bundles of residential mortgages that, presumably, have a known level of risk and a known return. The market price of agency residential mortgage-backed securities (RMBS) is very sensitive to changes in interest rates.
Many mREITS, including MITT, also buy mortgage-backed securities issued by commercial lenders. These non-agency securities, referred to as “credit” securities, can be a mix of those backed by mortgages on commercial real estate and/or residential mortgages. The value of credit securities is very sensitive to the creditworthiness of the underlying mortgage holders.
At the end of Q1 2014 (MITT’s most recently reported quarter), the funds that MITT used to build its agency portfolio cost the company 0.4 percent while generating a yield of 3.3 percent, for a NIM of 2.9 percent. For its credit portfolio, MITT’s cost of funds was 1.8 percent while bringing in 5.9 percent on the yield side, leaving a NIM of 4.1 percent.
As fixed-return investors know, during a period of increasing interest rates, value, as reflected by market price, of a previously issued, lower-rate security will tend to go down. Decreasing prices lower the “book value” of an mREIT’s portfolio, eroding the company’s ability to use their portfolio as collateral for new cash loans (and risking a margin call in extreme conditions).
Throughout the second half of 2013, investors were anticipating that the Fed was going to start backing out of its QE rate-lowering program. Backing out of QE, the thinking went, would raise interest rates, which would, in turn, lower the book value of the lower-paying securities in MITT’s portfolio. Fulfilling their own fears, the market price of MITT’s holdings started to fall accordingly. As Figure 3 illustrates, the book value of MITT’s portfolio fell to $19.14 per common share by the end of last year, even though the Fed did not start tapering out of QE until January 2014.
As we now know, while the Fed’s QE program was successful in lowering rates, backing out of that program has not pushed rates back up (nor prices down) as investors had expected. In fact, the book value of MITT’s portfolio increased to $19.53 per common share at the end of March 2014.
Rates will eventually increase
When the fear of increasing rates set in last fall, MITT got an opportunity to demonstrate some of the tools that are available to mREITs to mitigate the resulting drop in portfolio book value.
As expectations of a Fed QE taper increased last year, the company immediately began selling securities backed by 30 year mortgages in favor of those with shorter durations. Shorter duration mortgages get paid off sooner, limiting the price erosion that increasing rates can cause.
Securities backed by adjustable-rate mortgages (ARMs) provide another tool since the average yield is going to increase along with prevailing rates. MITT replaced about 30 percent of its agency portfolio with ARMs last fall.
Figure 4 illustrates the positive effect on MITT’s net income that resulted from these and other nimble maneuvers. Common stock investors have rewarded MITT’s portfolio management accordingly by delivering a 20 percent boost to the company’s common shares so far this year.
MITT’s preferred stocks
Issued less than two months apart in 2012, MITT has two traditional preferred stocks trading under the symbols MITT-A and MITT-B.
Shown in Figure 5, both preferreds have cumulative dividends with MITT-A offering an annual coupon of 8.25 percent ($0.52 per quarter) compared to MITT-B’s 8.00 percent ($0.50 per quarter). Given their generous dividends, most current shareholders are hesitant to sell, so volume can be fairly light with both issues (5k to 30k shares per day).
But notice that both of MITT’s preferreds are selling for a market price that is just below these securities’ $25 par values, adding a layer of principal protection to your investment and positioning today’s buyers for a downstream capital gain in the event of a future call.
MITT should be filing its Q2 2014 results within the next week.
For value investors considering MITT’s common stock, a continuing uptick in price may be unlikely until market participants have a better sense about the future direction of interest rates. At the end of Q1 2014, the company announced a quarterly dividend of $0.60 per share but the common, of course, comes with no guarantees whatsoever.
And as a REIT, MITT is required to distribute 90 percent of its taxable income to shareholders, beginning with preferred shareholders. If the company is able to meet that requirement without paying the common stock dividend, it will almost certainly do so.
Value investors are, by definition, less sensitive to risk than income investors. Given these uncertainties, value investors may want to consider MITT’s preferred shares as the next best thing, generating similar returns for less risk.
For risk-averse preferred stock
investors, the considerations are a bit different with such a young
company. The question for preferred stock investors is whether the
lack of independent ratings and interest rate uncertainty can be
overcome by MITT’s demonstrated ability to maneuver its portfolio
and these security’s 8+ percent, cumulative dividends.
More Preferred Stock Research
FROM DOUG K. LE DU
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PreferredsOnline (ePreferreds.com) Becomes Part of CDx3 Notification Service
Six month trial period ends with acquisition of PreferredsOnline subscriptions
I'm very pleased to announced that on August 1, 2014, Del Mar Research, LLC, parent company of the CDx3 Notification Service, acquired the subscriptions of PreferredsOnline (formerly located at ePreferreds.com). PreferredsOnline was founded in 2003 as one of the first subscription services available to preferred stock investors.
Monthly and annual PreferredsOnline subscribers are now enjoying the many features of the CDx3 Notification Service.
The acquisition process began last February when PreferredsOnline subscribers were notified by president David Landes that, until July 31, 2014, they would have "dual access" to both subscription services. This six month trial period allowed PreferredsOnline subscribers to become familiar with the many CDx3 Notification Service features and resources.
On July 1, 2014, Landes explained in an email letter to PreferredsOnline subscribers that "Our decision was based, in part, on the fact that we don’t currently have the expertise in preferred securities that we feel is needed today to address an investors needs. We feel that the CDx3 Notification Service and Doug K. Le Du offer that knowledge."
I want to thank David Landes and his team for working with us to make this transition a very smooth one for all involved. And, once again, welcome PreferredsOnline subscribers to the CDx3 Notification Service (be sure to check your inbox for a special email message that you received from me on August 1)!
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.
to screen, buy and sell the highest
quality preferred stocks by
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
CDx3 Notification Service
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.
take a look at
And if you
someone who might be interested in simple
for non-experts please have them
sign up for this free monthly preferred
stock research newsletter
They will automatically
begin receiving this monthly CDx3
next month (plus a
CDx3 Special Report) - all FREE.
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) 2014 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.