As Common Stocks ‘Party On’ Preferreds Follow

While common stocks party on the backs of extreme liquidity from government agencies of all sorts it looks like preferreds are joining in.

A few weeks ago I started doing a little dividend capture and new issue ‘flips’–given that I am flush with plenty of cash it seemed reasonable to try to garner ‘steak dinners’ (minor short term gains) on some new issues and dividend captures.

I started out by buying a 75% position in the newer Wintrust Financial (WTFC) 6.875% reset preferred at a price of $24.90. Given that I simply had a short term goal to garner 2% in a month or less I have now let this issue go (I sold it) as it hit $25.70 today. I left a little on the table, but the goal was reached–so the shares were sold.

Also a few weeks ago I bought a full position of the UMH Properties 8% perpetual preferreds (UMH-B). This issue is redeemable 10/20/20 and the company says they will be redeeming the issue. This is like shooting fish in a barrel as I bought shares @ $25.10 then the shares went ex-dividend on 5/14 for 50 cents. The share price is back above $25 so I have an order in to unload at a 2% gain.

With UMH-B with a ‘threatened’ redemption in October the shares should have a $25 floor–and should move toward $25.40 or so in August near ex-date. So one could go ahead and continue to hold–or sometime in early August it may still be around $25.10 in which case I would buy back–numerous ways to play this.

Another ‘old friend’ is the WR Berkley 5.625% subordinated note (WRB-B) which is currently callable–I bought a 1/2 position at $24.92 and it is now at $25.53–too high and I will exit today. It doesn’t go ex dividend until July so it has 1 1/2 dividends in the price, but could be called any time.

So I am off to see what else is out there to provide a little extra income while I wait.

28 thoughts on “As Common Stocks ‘Party On’ Preferreds Follow”

  1. Yesterday article that was linked on MSN from business insider
    750,000 new accounts opened. Kind of unsettling, and the title of this post on the forum is perfect. All the money on the sidelines, is getting invested probably in individual stocks as people who sat on the sidelines see a opportunity from the market drop to join in. Watching the last few years and thinking they missed the party .
    Newbies who have no idea on investing, or newly forced retirees who think they can manage their 401K better than the funds their company had them in.
    Be ready for massive swings if the market drops as at first sign of trouble these people will bail and maybe in their lifetime never to come back

  2. Regarding WRB-B, (WR Berkley), I’ve owned this issue for quite a while (almost since original issue), and bought more during the March purge and histrionics. Company carries an institutional rating from all of the agencies, though the pandemic will effect it in ways as yet unknown. It’s been callable since May 2018. Berkley issues a lot of debt usually to refi. The new issue debt (usually senior unsecured) always carries a lower coupon than the preferred (of course, lower on the risk scale). Why would it be called now? They have not used recent debt issues to refi the B preferred, but had they done so they would have saved at least 75 basis points in my view. The most recent debt issue is being used to retire a 5.375% senior unsecured bond. This seems typical of Berkley, using new issue debt to retire older, short-term debt. I really want to continue to own the B issue and I’ve not YET succumbed to the theory that it will be called (who knows?). Tim, are you just ready to take a profit or have you heard rumblings? I understand 1.5 times a quarterly dividend is included in the price, but I’m okay with losing a few cents if the issue is called. Am I not thinking about this clearly?

    Tim, as always, thanks for all you do for all of your readers. Nothing in the industry comes close to your lucid thinking and comprehensive dissemination of data–as well as your generosity.

    1. OldmannRB–thanks for your too kind words.

      I have used this one (WRB-B) simply as a capture candidate for 2 years (since it became redeemable)—buy around $25 and sell for 1-2% gain within a month. This time it popped to 1 /2 interest payments so I am out (I think–I haven’t looked to see if my limit order executed)—I have heard nothing about a redemption.

    2. OldmanRB, During March I sold my WRB-B and replaced it with WRB-F. Not for any immediate financial gain but I wanted to extend the call protection. My conclusion is rates will be lower for longer and any new issues will be at lower rates. JMO

  3. The notion that the Dow will hit 26,000 when 35 million are unemployed is troubling even to a capitalist like myself. The progressive pols are going to pound capitalism as only concerned about the Dow and not employment and exact a price. If the virus had occurred six months earlier I suspect Bernie would be the nominee

  4. When we bought our current house, our goal was not to carry the mortgage into retirement. I was 45 years old and while many of my coworkers were opting for 30 year loans, we took a 15 year mortgage. I asked the bank for a printout of every payment, principal and interest. We then would include the next month or two principal with each monthly check. I would always send my remittance with a note explaining why the check was excessive. Very easy to do with a new mortgage as the principal payments are quite small. Interest rate was probably double what people pay now. Paid that thing off in 6 years. There’s no feeling like owning the roof over your head .(as long as it doesn’t make you cash poor) That’s how in retirement we can afford these ridiculous real estate taxes in NJ.

    1. Vinney, I certainly believe your thoughts are correct. And to people who pay off all debt, I dont think one should ever regret that choice. I will get there eventually, but no hurry. I am one of the few oddballs that is retired with a mortage, a small home equity loan, a car loan, and even small credit card debt.
      My monthly cash flow easily covers it all and in fact I continually save each month after those bills are paid. If I wasnt in this situation, I would certainly pay them off immediately for piece of mind like you mentioned.

      1. Here’s what really sold me on mortgage prepayment. Newer mortgages have a very lopsided distribution, say for illustration 15% principal and 85% interest. So next month’s payment is $100 but if I pay the $15 ahead, the $85 is completely erased and that month’s payment is done. I was put onto this by, believe it or not, a bank that held the mortgage on my previous house. Interest rates had gone up and they were encouraging people holding older mortgages to prepay them.

        1. Jv – What you describe is of course the effect of level amortization and I agree there are many who only see that their payments go down when they refinance, not that they’ll most likely be paying themselves less each month in principal payments and more to the bank in interest in the beginning years…. We have a 3 3/4% mortgage right now and have been paying it down slowly, not too fast because we want to maintain the financial flexibility having a mortgage provides. However, recently I’ve been thinking paying it down or paying it off would be similar to investing in an issue with a high credit rating (i.e. my own) that pays 3 3/4%. In a zero interest rate environment, that’s not out of the question unreasonable investment anymore. The Corona Crash made me rethink that idea though under the “cash is king” banner even though the initial thought was that this is no time to be paying mortgage interest unnecessarily when the tax deductibility is no longer a benefit. Right now, we’re close to being able to refinance from a 30 year original terms mtge to a 15 year without increasing the monthly payments that we’re paying presently that include an amount above what’s due minimally AND still pay less in monthly interest than we are today while paying off the remaining mortgage balance 2+ years earlier … it’s tempting but point free mortgages don’t seem to exist anymore and I don’t want to pay pts or go thru the refinance hassle and/or scrutiny at 74 years old.

    2. Congrats JerseyVinny. I did the same but not as aggressive as you. When we built our current house, I was 30. While we took out a 30 year mortgage just to give us the flexibility if needed, I prepaid every month to effectively make it a 15 year mortgage.

      Grid – you really should pay off that credit card, unless of course you can use the money to flip more stocks for a profit exceeding the interest :). For most people. most credit cards charge high rates and are really the worst revolving debt to have because of that

  5. While the increase in the Dow and my preferred stocks today were nice, it certainly does not paint the whole picture. Today I dropped an item off at my local dry cleaners for sewing – and they have almost no business at all. As a CPA for local and small businesses for many years, I’m afraid many of these small businesses will fail soon if stores are not allowed to open up again soon. Guess everyone is working at home in their pajamas and clearly not much use for dry cleaning now. It was sad.

    1. Lou, we are an economy that is 70% consumer driven, so when 20% are now unemployed that is a serious forward problem even if everything was open it would seem. And I just shutter at how much of that federal money was shoveled out to people who did not need it.
      I golf with a group of 15 older retirees with net worths way more than me, and they all got checks, maybe Im just jealous because I didnt qualify, lol.. I have a friend and wife making $170k and they got $3400 with 2 kids and they are fully employed. Pension contributions pulled them under $150k so they got the whole thing. And I dont know how many dead people got checks. One in the group had one sent as their mom died last year. Treasury even wrote deceased on the check so they could cash…I thought that was odd until my step mom got double checks too. Seems she didnt file until April, so they reverted back to 2018 tax year and he died that year, so all sudden my dad is eligible for a check too though being dead for almost 2 years…And this is just my small little world…Think about the entire country, geez…Like I said maybe Im just jealous, ha.

      1. Grid – you hit the nail on the hammer this evening. My parents are on SS and then have about 50k of other income – so they got the first stipend and will get the second one too when issued. They also have a fair amount in municipal bonds which does not count for the limit (clearly not fair at all) – so they will get the next round of payouts, which they clearly do not need because they are not going anywhere now, except for carryout dining.

        Also, did a tax return for friends of mine and they were the same wage level basically – 150k due to pension contributions, but they got the check too. BUT note this – when I did the tax return for my friends that had 150k of income, I did ask for their 1099 statement for interest. They had no interest income at all. Nope, not even $10 and they are pushing probably $165k per year in W-2 income. I did not even ask them why they have no savings and investments. ……

        1. Ha, Good points…Im gonna eventually get 1/5th of that stimulus check down the road. My dear sweet step mom, isnt doing anything with that money but sticking it in the bank and never spending it. That is just the way it is.
          And your 150k friend mirrors my 170k…Not a nickel saved. And we are in a LCL area also. My friend isn’t dumb, he knows.. He doesnt need a Dave Ramsey book, he needs a daily paddle to his arse to control the spending, ha.

          1. My tenant who I love every month. Helped him file 3 years of previous taxes stated he thought deductions off paycheque would cover it.

            56yrs old. No interest income or further deductions.

            Suspect this is not uncommon as consumer is over leveraged.

            1. All here live in our own little bubble. We have thought about and planned or are planning for as secure a retirement as possible for our own unique circumstances. We are the few, the proud, the ones with foresight.

              But I also recently read this in a WaPo article:

              “Half of American families in the 56-to-61 age bracket had less than $21,000 in retirement savings in 2016…”

              I suspect the majority of those folks are headed for somewhere very unpleasant. I wouldn’t want to be them.

              1. camroc–yes–I have pondered this many times. I feel extremely lucky to have 2 General Mills pensions coming into the household on top of social security–with savings that may never be needed. You are right that we live in bubbles–most folks we know seem to have plenty–but I know that for everyone I know that has plenty there is at least 1-2 who are living on the edge.

        2. I congratulate your friends, lou. It’s a “wish” of mine to have no reportable interest income. As a practical I can’t ever achieve it but it’s a wishful thought.

      2. Retrospectively, and even prospectively I would argue, this helicopter money thing is a very terrible idea. It was bad when Obama did it and it was bad when Trump did it.

        With the WPA at least we got some bridges and dams out of the deal. Made the depression much worse and much longer than need be but we do have something tangible to look at.

      3. My neighbor showed me his mother’s $1200 check before sending it back to Treasury. His mom died over a year ago. The check was written out to her with the word DECEASED next to her name. Why the IRS could not run a match against the SSA death records and remove these names from the payroll is beyond me.

        1. The answer is simple – you can have speed, you can have accuracy – but you could not have both. The gov’t made the decision they needed to get the $1,200 payments out to everyone as quickly as possible. So naturally using 2018 data if no 2019 tax return was filed would lead to some deceased people getting checks that needed to be mailed back.

          To do a match like you suggest would I am sure delayed all payments at least a month or more

          1. Yes. Exactly. Reminds me of the old manufacturing saw:

            Three things about making our stuff for you: Good. Fast. Cheap. Pick any two. You want it good & fast, it won’t be cheap. Cheap and fast? It won’t be good. Etc.

  6. OK, this article probably falls under the category of political – but it is mainly about economics and the effect on the election so it is worth a read (just ignore the tie to politics if it bothers anyone)

    In essence, Jason Furman, a top economist in the Obama administration and now a professor at Harvard, is saying “We are about to see the best economic data we’ve seen in the history of this country,” And he goes on in more detail.

    And given the market is forward looking, well I believe that is what most on the street see too. Hence, party on

  7. Slowly pulling out as the rally goes on. Just gonna pay off the house, rather than, attempt a higher dividend income to mortgage ratio. Could be wrong, could be right, but at least, I’ll have a home and less worry over the market and whether the fed can endlessly prop it up. Welp, I’m going to go sit in the corner now and be like those guys on Marketwatch circa 2011-12 predicting doom and gloom for the next 8 years as they miss out on the decade long bull market.

    1. Looking to do the same on the house and 2nd car. DOW 18,000 back in March was awesome lol.

    2. It’s never a bad idea to pay off debt. Except for matching funds in my 401-k, I didn’t start to invest in the market until I was debt free. I haven’t been a slave to the bank for 22 years now and it feels great. Now if we could get rid of property taxes I’d really be happy, lol. ATB.

    3. Smit said: “Just gonna pay off the house.”

      Smit, I have revised my thinking over the years on this and no longer recommend paying off a mortgage if you have extra funds. The situation I keep running into is retirees that are “house rich and cash poor.” They cannot get a regular mortgage since they have no income and are forced into a late night infomercial reverse mortgage to fund living expenses.

      This would be very similar to someone today that has lost their job. If the unemployed person has a paid off house but no cash, he is in trouble. And good look doing a cash out refi when you have no source of income. Obviously this recommendation does not fit all. If you can pay off the mortgage and simultaneously have say 1 or 2 years of living expenses readily available, no problem. The problem occurs when you use most of your readily available cash to pay off the mortgage and have very little rainy day funds available. . .

      1. That makes sense, tex. I’m 35 with a steady income so it doesn’t pin me down as a retiree needing the cash for living expenses. But having a family and playing the market is just more stressful than 7-8 years ago being a single guy rolling the dice for the hell of it.

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