Exchange-Traded Debt and Preferred Stocks

Even individual investors should be allocating some of their portfolio in assets other than stocks.  Most people do that through mutual funds or CD’s, which have their disadvantages.  When bonds and preferred stocks are traded on the exchange, it gives individual investors three specific advantages:

  1. Minimum buy in is much lower; one share which is often in the $25 range.
  2. Freedom to choose your own companies and yields, instead of paying a professional to do it for you.
  3. Liquidity; shares can be bought and sold at any time.

The challenge of preferred stocks and exchange traded debt is to find out what’s available, what the yields are, and what the ticker symbols are.  Even worse, there is no specific system for this – the ticker symbol formats are different when using Yahoo Finance, Ameritrade, E-Trade, NYSE and so on.  Here is a list of some of the format differences for preferred stocks: http://quantumonline.com/PfdSymbolsNames.cfm

I just registered with http://quantumonline.com/ and it seems to be a valuable resource, where you can look through tables of existing securities such as these and organize by coupon, bond rating, etc.  It’s free to sign up and access these tables.  The downside with this though is that the data doesn’t seem to reflect current trading prices and yields. 

As for other resources … I hate to say it, but the most reliable for any of these is to run a google search and search through pages to see if they’re relevant.  Be careful of the dates when doing this though – I just ran into a 2008 site recommending General Motors debt because of the high yield (I lost some money on GMS personally back in 2008 – but gained on PRD at the same time which made up for it.  Call it distressed-debt fishing).  There are also a number of preferred stock or exchange-traded debt screeners that come up.  Some may work, but I haven’t tried them personally.

On Ameritrade it’s difficult to research these, but if you have a company in mind that you are looking for you can use the symbol lookup and type in the company name.  If you type in Citigroup for example, it lists 104 names – but you can sort by exchange (You typically want NYSE, might be worth checking NASDAQ, but nothing else.  Don’t touch the pink sheets- its not worth it).  Redo the search for Citigroup in NYSE and you get 17 results, 16 of which are preferred stocks with listed coupons.  You then have to select each one individually to find the current price and market rate.

Now you can see that it definately takes a bit of work to find these.  It’s not convenient, but I hope you can see it’s definately doable.  There are other considerations to take into account, however, when dealing with these instruments.  I’ll start by saying not to confuse them with ETF’s (exchange-traded funds), which are kind of like specialized mutual funds that are all different and have unique risks.  Back to the other considerations though:

  1. Preferred stock and exchange-traded debt doesn’t list much information when you type in the ticker symbol.  Yahoo Finance shows the current trading price, daily range, and 5-day chart.  Historical charts and performance can be found on Ameritrade.  If you want to know anything about recent news or reports on the company though, it will all be listed under the common stock ticker. 
  2. Preferred stock is not equity, but can be better thought of as the lowest junior debt because the yield is fixed.  However, there is no maturity date, nonpayment does not trigger legal default if the yield is left unpaid.  Instead, missed payments build up and all must be paid before any dividend can be issued to common stock holders for cumulative preferreds, while non-cumulative preferreds must be paid for the current year only prior to any dividends to common stock holders.  These risks give preferred shares higher yields than you would get as a debt holder.  Just like with stock dividends, the safety of these depends on the continued earnings of the company.  Reliable companies with dividend-paying common stock, such as Chesapeake (CHK), will tend to have safer preferreds.  
  3. Like debt, preferred shares carry interest-rate risk because they lock in a specific yield.  If interest rates go up, the value for which you can sell your preferreds goes down, to give the new buyer the current yield rate.  If you hold them, they will continue to  pay the same rate for the life of the company – which will give you a lower rate than if you bought new shares on the market.  If interest rates go down, you have the opposite affect.  Unlike debt, however, there is no maturity – which means that a change in yields will have a much stronger effect.

You may be wondering why I’m suggesting a look at preferreds when the central bank’s easy-money policies are set to continue indefinately.  The reason is that I’ve been thinking, especially after Rosenberg’s explanations in his newsletter, that it makes sense to expect low inflation and low yields to continue for some time. 

Consider that US consumer, business, and government debt hit record levels in the 2000′s – and the credit expansion cycle is over.  This debt will take years to pay down and/or default out of, which will have a continued disinflationary effect on the economy.  After 20 years of easy-money policies from the Bank of Japan, for example, government long-term yields are just north of 1% and they still have problems more associated with deflation than inflation.  Income-oriented strategies like these will have considerable value in such an environment. 

Keep in mind this doesn’t change my bullish stance on gold, however.  I still think gold is great in an environment with easy central bank policies (including quantitative easing) and low yields (not much yield given up for holding it) – especially when economic and financial uncertainty abounds (safe haven investment).  In addition, gold is a very small and growing asset position for both individuals and central banks, and gold supply has been slowing considerably over the years.  After Nixon took the US off the gold standard in the 1970′s, central banks had divested almost all of their gold holdings over the following decades- and there is good reason to think they’ll be putting some of it back in when you look at the deteriorating government balance sheets in the US and Europe.  As a kicker – gold is good protection from central-bank induced inflation which could hurt holders of long-maturity debt and preferred stocks, and thus is a good balance for the portfolio.

I am currently holding some C-F (Citibank preferred; C-PF on yahoo) and HYK (Goldman preferred) in my Roth IRA where I won’t have to worry as much about dividend tax hikes – and of course plenty of GLD.  I figured the too-big-to fail Citibank would probably be a decent bet with preferred shares, and it has a relatively high yield near 8%.

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About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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One Response to Exchange-Traded Debt and Preferred Stocks

  1. Damien says:

    Do you have anyy video off that? I’d caqre tto fiind out sopme additoonal information.

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