Decisions to Make as “Base Holdings” Climb Higher

I think most all of us are in the same predicament. Shares in the preferreds and baby bonds that we hold as “sock drawer” holdings have climbed higher and higher. The question one always asks is “when should I sell my position?”

Our sock drawer holds the positions that we intend to hold for a very long time–of course we never imagined that they would climb as high in prices as they have during this time of falling interest rates.

In particular some of the base holdings we have they we are eyeing are the following—

  • National Rural Utilities 5.50% Subordinated Notes (NRUC) which is trading at a crazy $26.69. We bought these on 5/16 for $25.35.
  • Nextera Energy 5.65% Subordinated Debentures (NEE-N) which is trading at $26.10. We bought these 4/3 for $25.31.
  • Gladstone Investment 6.375% term preferred (GAINL) which is now at $25.87, but has been popping above $26 many days.

Many of you are in the same situation. The problem is simply one in which there are few better options out there to buy and with interest rates falling it is not likely to get easier in the near future.

I think it is likely I will sell the National Rural Utilities issue as it simply has gone too far too fast–a years worth of interest is a pretty good premium to capture. The others we will hold as their price isn’t crazy high–yet.

26 thoughts on “Decisions to Make as “Base Holdings” Climb Higher”

  1. Great sharing of opinions here–just like I hoped. After all these years I still am comforted to get some feedback from the crowd–makes one be able to weigh all the options.

    1. I sold my remaining shares of MGR, YTC only 5.2%. Picked up another 200 shares of NRXPP @ $25.45 right before the market close. Pricey but perhaps safer than buying common stocks, such as JCAP, Googl or CTL.

    2. Tim,
      What about abr-a, callable and trading @ >$26?
      How would you assess the probability of it being called (as well as ABR’s 8.5% abr-c, also callable since February)?

      Are you also considering selling abr-a or are you keeping it in the Enhanced portfolio?


  2. Great sharing viewpoints on this subject! The decision to take capital gains involves multiple criteria for me.
    + Short or long term capital gain?
    + Taxable or tax-deferred account?
    + QDI or non-QDI issue?
    + Investment grade or junk credit rating?
    + Level of IG rating?
    + Liquidity of issue?
    + Replaceable with similar grade and return security or not?
    In general my goal is to put all my resources to work earning either income or capital gains. In my opinion UNREALIZED capital gains are not working at maximum to attain that goal in many, not all, cases.

  3. Lots of interesting comments. I have been thinking about this a lot lately. I have 4 reits that are up 30 to 70 percent. That 6 to 9 years of income.

    As has been mentioned, its hard to sell when there is nothing to buy to replace it.

  4. I’m glad this discussion was started. For those of you who have traded in preferreds for many years, have you seen a cycle similar to this one where we have just exited a period of rising rates (with the expectation of more to come) to a quick turnaround to an expectation of lower rates? I know there is no crystal ball, but does anyone have any thoughts as to the effects on pricing of preferreds, in a 10%, 20%, etc. market drop in a RATE LOWERING PERIOD? It would seem to me that people would be more inclined to keep their decent coupon, decent YTC, IG issues especially; and that the prices would not fall to the extent that they did last December. I bought a double share of NRUC for the specific purpose to flip half, but now I am less sure due to its very high IG rating.

    1. Pete, I don’t know much and I admit it so only because nobody else answered. Every opinion expressed on this thread is correct. They differ because people have different perspectives and experiences. Nobody knows the future so all opinions are correct for that individual until proven otherwise. To answer your question the last time it was a decade ago. Very bloody. Preferred got slaughtered in many cases worse than common. No consolation in the IG reaction although it was better than junk. December was a cakewalk in comparison, a Birthday party with balloons and streamers. Check the charts. I’m not implying something similar is at hand just answering your question. I survived it but lost 8.62% in 09 (didn’t have to look that up I remember it), actually made money in 08 and starting in 10 it was off to the races.

  5. Why did I buy my shares. Unless I bought a new preferred for trading purposes, I have bought them for future income.

    So I do not get caught up looking at gains on shares and trying to get cute and sell and hope to get them back cheaper. I bought them for income, I will hold them for that.

    The 2 exceptions are:
    1. if there is call risk involved – then I will take a hard look at whether it makes sense to capture the gain
    2. if there is a good swap to be had (say I own one NLY preferred but it unexpectedly runs up and I can sell it and replace it with a different series NLY preferred, I may do so)

  6. Good thread. I own National Rural too. It is a ridiculous run up. I don’t see any problem with seeking out today, at $26.69 (!!), and putting in another limit order at something like $25.69, insulating me from a drop. Pretty sure it will get back there but before I get a chance to sell it at $27.69. It doubt it will ever go that high.

  7. Indeed, these high prices are a “problem” to us. I like the “1 year profit rule”, or a variation of it described below.

    Obviously, nobody knows how much higher or longer these will go, but personally, I do the following bet. Assuming no call risk in a preferred that today is at say $26.50 that pays $0.40 a quarter, I ask myself: Is it plausible it will drop to $26.10 ($25.50-$0.40) within 3 months, or to $25.70 in 6 months…. or to $24.90 in 1 year? If I guess it is plausible, then it is a sell.

    What to do with the cash? Put it in a 2%+ money market (like Vanguard’s) or even in a 2.5% CD (like in Marcus) if I bet for 1 year, or even in a 1 year treasury at almost 2%. So there is an additional ~2% in my favor (equivalent to about $0.50 in a $25 preferred).

    What will hurt more? Cashing in plus 2%+ and not seeing it drop in price,
    or keep it, receive a few dividends and then seeing it drop to $25, $24 or lower?

    Obviously, with call risk it is much easier to sell when the yield to call becomes negative. IMO it is not a good idea to hold a preferred with a very negative ytc (and there are quite a few of them today, most of which I have sold).

    So, to sell or not to sell, that is the question

  8. I take a somewhat different perspective as many of these pfds have appreciated because of the rapid fall in rates. This is not good news long term. What will need to happen to put the economy on the right track where we can get moderate inflation with higher rates? Who knows but I protect principal whenever I can if pays to do so as there will be significant opportunities ahead if the risk is in line.

    I know that this discussion involves “sock drawer” types but I really do not discriminate. If I can get 12 – 18 months of interest, I’m out.

  9. I hold several issues for income that have increased significantly in price. I refuse to sell unless I have a specific reason to sell or something better to buy. With very few good replacements, holding is easy. I need to learn Howard’s lesson of selling to avoid large losses. That’s tough with market volatility that can drive prices up and down like the tide.

  10. Lots of great comments on this thread…I’m in the buy and hold camp on these new issues that have increased in price (NRUC,DUK-A,F.PRB, etc.) but less so with any preferred that have passed their call date. I sold a position in NEWTZ recently because it was past its call date and had hit $27.

  11. I’ve built what I think is a nice portfolio of preferreds since last Nov all thanks to Tim and this community for sharing their knowledge. When building a position I layer my buys into 2 or 3 orders depending on price movement. I apply similar concept for exiting, so it doesn’t hurt to take partial gains off the table. As much as I tell myself this portion of my portfolio is for income it’s hard to ignore market gains like AMH-D (up 21%) and SPKEP (up 34%).

    1. Right, hard to ignore. I rolled over most of that +20% December stuff already but kept all the December IG stuff. None of my December IG buys is +20% so that tells you something right there.

  12. I sold NRUC. I am holding NEE-N which is trading at 26.10 with a 5.65 coupon. The sister NEE-K is at 26.18 with a 5.25 coupon, so I feel there is still some upside to NEE-N

  13. NRUC is like a coffee can of gold buried in the back yard. I’ll only dig mine up when it’s down 10%-20% so I can buy stuff that’s down 20%-40%. That pretty much describes the bulk of my current portfolio right now (I hope). Yields a little lower than I’d like but trading has been easy pickings so I’m good. Past call stuff or non-IG I’m open to selling off for a quick buck but not the good stuff unless something macro changes.

  14. As long as the rate bias is down with the Fed likely to cut, why sell any preferred? Unless you think a common stock correction will pull them down even in the face of falling rates, why not let the ponies run?

  15. I’m of the same opinion as Howard. I understand the temptation to lock in the gain but then I have to remind myself why I bought the issue in the first place.

    I bought the Ni-B issue OTC like a lot of people and then it ran up. I sold and now I regret having done so. Good issue with a good yield that would have paid me for years but I got greedy and took the gain and let it go.

    I bought NRUC for the income stream. I think I’m going to hold my NRUC unless someone can show me a better use for the proceeds on an issue of equal quality. Today’s market is issuing junky issues at low yields. I don’t have a crystal ball to tell me that the funds from selling it would be put to better use anytime soon.

    1. I also have the same problem not only with preferreds, but with bonds. I called the head bond adviser at Schwab and he asked me one simple question. ” Why did I buy the bonds/preferreds?”. I told him for the income. He said “What’s changed in your reason for buying them”. I said nothing. He advised not to sell.
      I’ve had worse problems like defaults.

      1. CTL bond has some duration risk. New CEO from Level 3, gave himself and management huge bonus. Cut dividends by one half, has lots of free cash. CEO Storey and his Level 3 does have lots of tech. Morningstar continue to believe that the common stock is grossly undervalued. The bond is safe IMHO. I have quite a few positions on the bond:

        CENTURY TEL ENTR INC NOTES CPN 6.87500 % MTD 2028-01-15 DTD 1998-01-15
        CUSIP 156686AM9
        S&P rating B+
        Moody’s rating B2
        Yield to worst at the time, a little below 6.9% or so. It has appreciated some. This beats the baby bonds issued by the Company. Someone perhaps a decade ago suggested CTL bond in lieu of the baby bond. It is now trading almost close to par. I have also bought CTL common at various times, mostly still under water. We will see Earnings Call transcript in August.

        1. I got out of CTL. The new Level 3 crowd, has hinted at looking for strategic options on their retail business. Doesn’t seem like they want to be doing B2C type businesses. More B2B which is where level 3 guys come from. Okay so we want to change business strategy and reverse the merger? I booked my profits and moved on.

  16. I own all the issues you listed, Tim. Along with sock drawer residents AILLL, CNLPL, CNTHP, FIISO, IPWLK, CBKLP and couple others.

    Like you ( and camroc ) I am getting somewhat nervous at the high prices most of these counters command today. And the call risk is always there, and getting higher as rates go further down.

    But at this time, I cannot imagine selling, there are few worthy replacement alternatives. Just have to hope no calls come.

    But I was dead wrong about HE-U; that one caught me off guard and cost me a portion of the dividends I’ve enjoyed for years.

    1. Looking at call risk puts a whole different perspective into play.

      If NRUC was callable within a year I would be looking to sell at the current price, however, I paid a few pennies over par and there are almost five years to first call. For my purposes it’s worth holding even if I lose much of the capital gain currently in the issue.

  17. Just a thought. Those looking to sell sock drawer issues may want to layer out of them. Selling maybe 1/3 or 1/2 of a position first. This way you have booked profits and still retained the issue for the long term. But if they continue to go up, you can eventually exit.

    I am holding on my sock drawer. My yields are all in the 6.2% range at the low end. If I owned the 5.x% range, I would also be considering exiting. My logic is the 6+% range will correct less than the 5+% range

  18. Tim
    I don’t look at my gains, I look at my losses ( if any ). Gains do not concern me and I rarely take advantage of them because I purchased the shares for the income; I just make sure I do not incur large losses. I cut losses quickly and use the money elsewhere. When I review my positions, which I do almost daily, I look for the RED, not the GREEN. ( Really glad I am not color blind ).
    It also depends on when a product may be called in. I own a Canadian closed-end fund that may live longer than I do, as there is a vote to terminate or continue each 5 years, and continue always seems to win. Strong dividend. May even offset the currency exchange’ some century.’ Each investor to their own method. Thanks for great site,

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