Quality Preferreds Still Too Expensive for Us

We are watching the quality preferred stocks–you know the ones–those issued by CEFs, banks and insurance companies and REITs such as Public Storage–generally investment grade.  There has been plenty of pain dealt out in these issues.

Our ‘sorted by share price losses’ list here shows they are still being spanked.  We would kind of guess that those issues that were sold earlier this year with coupons of 5%-5.50% are now closing in on 6% current yields in many cases.  Certainly closer to where we would like to buy them–BUT with our personal outlook for somewhat higher interest rates in the next 3-6 months we think they will present better bargains later.

On the other hand for those that simply want SAFETY–NOT so sensitive to net asset value erosion this could be time to add a bit to positions.

14 thoughts on “Quality Preferreds Still Too Expensive for Us”

  1. I guess this comes under the heading of ‘every cloud has a silver lining’. I’m retired and live off the proceeds of my IRA whose backbone is made up of various preferred stocks. (used to be a CD ladder but Mr. Bernanke killed that approach). This year, my Required Minimum Distribution (MRD) required me to deplete the account by more than I needed for living expenses. I’d prefer not to do that. This downdraft in pricing should reduce my MRD next year to a level I’m happy with while not affecting my actual income.

  2. Can anyone explain why there doesn’t seem to be any sharp difference between fixed rate securities and floating rate in that the market seems to be taking both down indiscriminately. I would have expected differently given our rising rate environment.

    1. Jersey, when dealing with preferreds, one always deals with, interest rate risk, credit risk, duration risk, and sentiment (market) risk. Any and all can be pulling down issues at same time and indiscriminately too. FWIW, I only own one live adjustable NSS, and allowing for fact it went exD last week, it hasnt moved at all either way for several weeks.

    2. Many of the live floaters are very low rate and effectively fixed rate, i.e. BML-J is LIBOR +75bp, min 4%. Because of where LIBOR is this issue is stuck at 4% unless LIBOR goes above 3.25. But its price is set off the long end of the curve, which is going up. It’s inverse carry.

      Much better are F2F issues where the float date is not too many years off and where the float rate does not have a built-in drop. INBKL or AHL-C would be examples of such. They will still drop, but not as much, and you won’t be stuck with a low yielding perpetual if rates stay high for years.

      1. I have to admit, I have looked at those two. AHL-C has dropped right along with the fixed ones…Mostly because the adjustable is off into the future. My experience shows me these fall off just as quickly as the fixed. But they do provide some future protection…Provided the replacement to Libor like the overnight lending rate for example “doesnt screw one over” which is possible.

        1. Grid and Bob, the AHL.C is a quality issue, but won’t float until 7/1/23 and it is “just” 5.95% for almost the next 5 years. IMHO this is too long to wait while there are so many other baby bonds or preferreds that look a bit more attractive. Wishing you profitable investing, Nomad

          1. Nomad, I think you and Bob are both right, lol.. Depends on ones goals. Im in the camp of needing more drop to entice since, I dont have idle cash laying around anyways. QDI does have added importance to me due to my retirement tax bracket. For long term holds due to precarious level QDI preferreds sit in capital structure, I generally buy these with higher quality.

        2. At present price AHL-C gives you a 6.0% SY and a somewhat higher YTC. The float rate is above the coupon, so it’s not going to become a low rate perp. I can live with 6% QID from a BBB company (even if it’s an insurer) for an effective term of less than 5 years. I care little about intervening price movements unless it due to a credit risk issue.

  3. I am using GTC buy orders at various downside targets and for small lot sizes, anywhere from 50 to 200 shares. I’ve had several hit yesterday and today and also getting a few odd number of fills, e.g. 11 shares, 39 shares, etc. These include preferreds from ALL, USB, GLOP, APO, NGHCO, SF, DCP, AMH.

    1. Outside of GLP-A selling off (but recovering some today), this “sell off” has been a non starter for me. Im actually up a on the week in part with AILLL going exD today. Really nothing on own is down more than a dime this week, but other preferreds outside of my targets have been hit… I need more sell off to induce me out of my area into the others that are dropping.

      1. Hey Grid–yes with the exception of the hated Spark Energy Preferred my accounts are off .1 to .3%–no biggy. The friggen Spark Energy preferred (SPKE-P) is going to get jettisoned next opportunity (over $24)–I am not worried about it-just hate the price action.

    2. Leonard–probably a good way to play it. I have a feeling there will be opportunities of all sorts for months to come.

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