No Traction In Preferred Stocks

As many readers and commenters have noted that even with the 10 year treasury dropping in yield and even with Jay Powells’ dovish comments preferred stocks continue to move lower.  We can verify that on average perpetuals continue to drop.  Of course averages are just that–averages and the numbers do not tell the tale for all investors.

A week ago the average $25/share preferred was priced at $23.77–today that average price is $23.58.  No only is this average down on the week–it is down by one of the sharpest weekly losses that we have seen in the last year.

Additionally a week ago we had 261 $25/share preferreds trading below  $25–today we have 286 issues trading below $25.  So while there are outliers dragging the average price down (such as Maiden Holdings, Amtrust etc) it is not just these few issues driving the preferred market.

While the economy is in ‘Goldilocks’ mode at the moment, obviously preferred shares are not following suit.

While we hold plenty of short duration securities the few perpetuals we do hold have caused a little damage.  Today, which is a big dividend day for us (because of all the monthly paying Gladstone issues), we end up near even for the day because we lose a dime here and a dime there on the perpetuals we hold and they balance the dividends received.  Frustrating.

We know everyone out there is going through the same situation and there are no magical answers to the problem, but we are relatively confident that absent a black swan event preferreds should start creeping higher very soon.  As we mentioned we are looking at entering more perpetuals toward the end of December and January (getting the Fed hike behind us) and we are hopeful for a stable preferred market by then.

In the meantime investors should be looking at their shopping lists–not for Christmas, but for their portfolios.  Preferreds from REIT Arbor Realty and MLP Nustar are extremely tempting, but it is too soon for us so we will build the list and wait another 4 weeks.



38 thoughts on “No Traction In Preferred Stocks”

  1. Right now, I like CTAA. 7% coupon. Call date is 02/21. Currently yielding 7.15%. CenturyTel called in similar issues at 7% coupon in September of this year. This is low investment grade (BBB- by SP). In my mind, a reasonable candidate to be called in 27 months based upon what CenturyTel did earlier this year plus CenturyTel needs to reduce debt. That will add another 2% to the gain at the current price, so all total should be above 8% for low investment grade quality with a short holding period. I own it and may add a little more to stretch it to 5% of my total holdings.

    In terms of selling, I am going to divest Met-E, All-G, PRS (prudential) and WRB-E (WR Berkerley) when the price is right. These are my issues with a coupon less than 6%. The represent 15% of my holdings but right now, the minimum coupon I am looking to hold is 6% (if it floats) and 6.5%(no floating) with a goal of 7%

        1. BTW, the 4 issues I mentioned above with less than a 6% coupon DO represent a good percentage of my pullback. Although the $$ invested represent 15% of my holdings they represent 27% of my capital losses. Makes sense, the lower coupons are less valuable in a rising rate environment and are a potential trap.

          Fortunately since September when the pullback started I divested KEY-J, NCVPRA, JPM-PRD, and BAC-B above the price I paid for it, and WFC-Y and GOVNI a few pennies below it. So I cut my non 6% coupon issues (BAC-B was 6%) down from 10 to 4 with no pain.

          1. Steve, I believe your current assesment is fair and in general what I am tracking in true perpetuals. The key to me keeping all my cap gains this year, was I refused to accept buying high quality sub 6% issues this year (and refusing crap high yield also) . I just piled higher and deeper in the few plus 6% quality issues that were past call and above par. Paid off nicely. I have paired those down now over past month and moved some into issues that have dropped into a relative buy zone for me.

            1. I brought my 1st preferred issue in March 2018. Before than I had PFF and PGF for my preferred stock investments. 2018 – some rookie mistakes. 2019 – let’s play football

              1. I made the high quality, lower yield mistake last year, or the year before.

                I am proud to say I am making new mistakes this year ;o)

  2. Really guys, We’re holding a pile of fixed income securities in a rising rate environment. Did anyone not expect to be hurt? I’m also seeing a lot of red but I use these dividends to put bread on the table and my income stream hasn’t been hurt at all. In fact, it’s being helped by my ability to buy discounted shares. Another silver lining is I expect next year’s RMD (required minimum distribution) to be significantly lower than 2018’s was. This year my RMD forced me to remove more funds than I need to live on. Next year, I don’t expect that to happen. As for the potential capital loss, that’s my heirs’ problem. I’m mostly interested in the income stream. Even an ill wind blows some good.

    1. I hear you Vinny…I wont aurgue with the facts, lol… But I have been shooting fish in a barrell for 4-5 years now. Seeing an issue drop 35 cents from my purchase price is traumatic now…Yes, I have been spoiled!

      1. Grid,
        I am with you here. All of a sudden I see a “meaningful” red % number difference between book and market value in my portfolio. But then I look at the other side of the summary balance and I see green 9 % for the last 12 month. Which tells me things are not as bad as it seems.

        1. LYR, I just need to put my big boy pants on and prepare for giving back a little bit. I am not going to risk relative safety to dumpster dive for quick profits. I dont know if you saw this as posts get lost easy, so I wanted to ask did you see my other post to you that I decided to try and snag some EBBNF you mentioned the other day? I got 300 at 19.50. It looks like 500 traded at 19.46 today.

          1. GB – where does one find a prospectus on EBBNF? Seems to be a stealth issue. Looks to be a 5-year reset currently at 4.96% but me thinks there is more to this one.

            1. Bob, it is a US 5 year TBill plus 3.05%. It only resets every 5 years. This issues real ticker symbol is ENB.PF.U ….It actually has decent daily volume on the Toronto Exchange. It was issues in 2012 as a flat 4% fixed, that went adjustable in 2017 and will reset in 2022. It current pays 1.24 annually at .3099 quarterly which is a present yield of about 6.37% off last trade at $19.46. EBBNF is just an OTC grey market symbol to sneak a few of the shares onto US market to trade.
              The prospectus can be found under Enbridge website. Go to investor relations and then hit the preferreds box and all their series of preffereds will pop up. EBBNF is the Series J issue. There is a hyper link on the Series J line that will open up the prospectus to read.

              1. Grid,
                I replied to you on the other post. Cannot remember which thread. Small correction about reset rates. I made mistake myself as well.
                Here it is:
                ENB.PF.U reset is “5 Year Treasury Rate” plus 3.15%
                ENB.PR.U reset is “5 Year Treasury Rate” plus 3.05%
                ENB.PR.V reset is “5 Year Treasury Rate” plus 3.14%

              1. Limit, you dont have to apologize when you are giving me 9 more free basis points, lol. I will admit I just went off it being the PR (the series J) instead of PU you mentioned. It was so close I didnt really worry about it at the amount I was buying. I have seen their preferreds before and they got more than you can shake a stick at. Im still not going to look at it, so Im taking your word. If you change your mind, then mine will automatically change also. I know for certain I am getting a $1.24 yearly off the $19.50 purchase price until 2022! 🙂

                1. Thanks GB and LYR for the info. What an odd bird. Company did a back-door registration of the issue but never listed it in the U.S.

                  I’m thinking that EBBNF is QID. If it isn’t QID then ENBA looks to be the better issue.

                  1. Book ‘em Dano….Its QDI…From prospectus…Now keep in mind the Canadian with holding tax.
                    Corporation. See “Plan of Distribution”.
                    In the opinion of counsel, the Series J Shares and the Series K Shares, if issued on the date hereof, generally would be qualified investments under the Income Tax Act (Canada) (the “Tax Act”) for certain tax-exempt trusts. See “Eligibility for Investment”.

                2. Grid, at 19.5 you got a better deal than I. Congrats on that. My cost average about 80 cents higher than your purchase. In any case, I like current yield and even more future reset rate ( if nothing change )

                  1. Limit, it was blind luck. With no formal bid/ask showing all I had to go on was last sell point and the previous prices sold in past 6 months (which were even higher). I only put out a 300 share probe bid. To be honest I cant remember off top of head exactly, but I put my bid somewhere around that $20.50 previous sell price. They sold maybe 10 minutes later at that $19.50 mark. Somebody got 500 at $19.46 on Friday. Would have been curious to know what their actual bid was submitted at.

  3. I also feel the damage. My portfolio is something I plan on holding for 5 years so it not a loss or a drop unless I sell it. I preach patience but at times I do want to scream. Today is one of those days. Watching 10 year drop under 3% and most preferred dropping in price is very frustrating. Markets are only rationale in the long term. So yes, figure out where bottoms are, this should reverse at some point

    1. Yes SteveA–patience–in a couple weeks we will see a few coins back in our pockets.

  4. Today was a big buying day. Many quality issues, including F2F, term, and BBs at close to 52-week lows. We have a few more rate hikes ahead of us but I’m still biting.

    1. bob-in-de–soon I hope to do so. Some stuff seems ridiculously priced, but things can always go lower.

  5. Tim, like yoiu, I am also seeing some damage in my portfolio over the last 2 months. Discouraging, but I try to focus on the income stream and not the NAV.

    Hopefully, this decline is exhausting itself soon and we can look forward to some price stabilization. Will not be selling any of the preferreds I hold, as they are all strong companies and able to sustain the dividends.

    Really hope 2019 brings better performance!!

    1. Inspbudget we clearly screwed up a few years ago. We should have put all our lifetime monies all into FIISO instead of the few hundred we both own. It has only traded 76 shares this entire year. So that means the stock price never changes if a 100 block isnt sold. You cant lose any value if something never sells, lol.

      1. Hey Grid–that is one way to do it–certainly of all of us you would have the most experience in ownership of sock drawer material

        1. Tim, Inspbudget and I are getting to be old online buddies. I think he learned to trust me when I got him on to FIISO several years ago. And CNLPL, CNTHP, and AILLL several years ago, lol…Old people like us like old preferreds! 🙂
          If I had any stones, holding some of the newer NS preferreds could be a great long term play. But their finances are papered over in preferreds without penal yields and that private placement they just did was done at yields that would get people thrown in jail in the old days, lol. I am barely comfortable owning NSS.

          1. Grid–those NS yields are so tempting–but not now–even NSS, but I have been close to buying it. Guess I need some handcuffs to attached to my chair so I can’t read the keyboard.

            1. NS last qtr was good, just closed asset sales, leverage coming down, volume coming up. I think they’re at inflection point.

    2. Inspbudget–each year I say ‘it is going to be a tough year’ and this year it is making out to be just that.

      I am focusing simply on income and safety–and keeping some dry powder for ‘blue light specials’.

      1. Tim, I have a strong feeling that we will all get some even better bargains this upcoming month. There will be great volatility and we all must be diligent to pick our quality buys and not hope for miracles or reach for junk yield. Wishing you profitable investing, Nomad

        1. So Nomad–anything in particular you are tracking? I have plenty of dry powder so maybe will just need the stones to pull the trigger when the time is right.

          1. It might not be a bad idea for everyone to chime in with what they are tracking for end of year purchases. I imagine it will be a pretty varied menu depending on everyone’s different needs.

            I keep a spreadsheet of all preferreds that tracks what percentage each issue varied in price over the past year and how close it is to its 52 week lows. I have it automated now and am just starting to figure out if it will be useful for anything. I figure if someone is like me and doesn’t like seeing the principal move around a lot then it doesn’t hurt to screen for that characteristic.

            1. Scott, good question. What one tracks probably follows ones needs and expectations. I am a bit of a Pied Piper dancing to my own tune. It works for me, but hard to follow. Throw in the contradiction, I invest entirely for income, even though I never spend any of the income, lol. My pension is all I need. Value is a relative word. Compared to a year ago many do offer value. But if you want to compare similar preferreds still outstanding from 2013 Taper Tantrum, when yields were similiar there is zero value, in fact they are still over priced.
              Throw in the fact I wont even look at 90% of the preferreds trading, this keeps me in a tight circle where I will only bounce in and out of similiar issues off buy/sell imbalance. Referencing Bob below, I have taken the opportunity to create a better mixture inside my circle… I now have a more balance between F/F, Term Dated, and perpetual. I am very pleased with what I own, and presently am only hunting down one quality illiquid to buy more. It actually isnt even a utility, lol. Once I get it I may be more on autopilot and just look to add on new cash.

          2. Hey Tim, I have 117 income issues I currently follow and through Merrill Edge (I am able to receive 100 trades a month for free there) I get text alerts when one of them triggers my buy price. I invest in taxable and tax free bonds at Vanguard. Added to KMPA again today and believe it will called in late February. I loaded up (again) on ALLY preferred A this week and initiated a position in shorter term baby bond/note GLADD. I am a very conservative investor that believes the vast majority of invested money should be in broad based index equity funds for the risk side/growth side of ones portfolio. I have posted my basic investing rules and thoughts before on your site 11/01/18. I enjoy your insights and thank you for being so humble and quick to help others.
            All the very best for a lifetime of profitable investing, Nomad

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