PREFERRED STOCK
Evan Caplan
WHAT IS A PREFERRED STOCK?
A preferred stock is an equity security with debtlike characteristics
Debt similarities
Pays a fixed dividend Senior to common stock in capital structure
Equity similarities
Lower in capital structure than debt Many preferred are convertible - Allows participation in equity upside
WHY PREFERREDS?
Get paid
Receive a fixed dividend payment so long as the company remains liquid
Protect principal
Senior to common stock
Wide spreads
Preferred typically yield more than both common stock and debt vs. treasuries, corporate bonds, and munis 10-year treasury currently below 3% Preferreds currently are yielding a minimum of 6%
UTILITY PREFERREDS
Non-convertible
Effectively subordinated debt with a slightly higher yield
Very safe
Backed by some of the largest utility companies in the world
No surprises
Utilities are predictable due to cost and rate structures
Currently yielding just over 6% Thinly traded
Especially on major exchanges
FINANCIALS PREFERREDS
Convertible (frequently)
Equity upside while getting paid to wait
Higher risk
Backed by financial institutions
Higher return
Many issues yielding nearly 20%
WHY FINANCIALS PREFERREDS?
Financials exposure
Regaining exposure in an alternative manner
Get paid to wait
Preferred stock will outperform in a prolonged recovery phase
Political protection
US and foreign governments own large quantities of preferred shares
Insistence on private ownership
Can’t wipe out stockholders then expect new investment
ISHARES S&P U.S. INDEX ETF (PFF)
PREFERRED STOCK
Invests in preferred stock and similar securities 80-85% financials
Some health care and industrials No utilities because of market cap restrictions
0.48% expense ratio
Lowest of the three major preferred stock ETFs
Recommendation:
Buy PFF