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The Fed's monetary policies have artificially inflated preferred stock prices for the past year or so. Understandably, those who have paid these high prices are very sensitive to any sign that the Fed is going to back away. On May 30 we got a rare chance to see just how sensitive this group really is. The May 30 event resulted in 34 call-protected high quality preferred stocks trading below $25 per share compared to just nine on May 29...
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Preferred stock investors are accepting more investment risk to receive the same dividend reward when compared to last January. Using Moody's ratings as a proxy for investment risk, preferred stock investors have become more risk-tolerant this year.
Using current yield as a measure of reward, investors are accepting 6.15% at the lowest Moody's investment grade level of Baa3. At the end of January 2013, these investors were demanding a 6.43% return at this same level of risk. The huge May spreads that we see at any given Moody's rating are being caused by the fact that Moody's and preferred stock investors are defining risk two different ways...
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April 2013 was a good month for preferred stock investors. New preferred stocks issued during April 2013 offer an average dividend rate of 6.65% to income investors. The number of new preferred stocks introduced during April also marks a substantial increase in the number of new preferreds when compared to new issues from a year ago. Last month's 17 new securities is a 42% increase over the twelve new issues from April 2012.
While the average 6.65% rate is not as exciting as the rates we were seeing a couple of years ago, it is substantially better than the other alternatives currently available to income investors. Investment grade corporate bonds closed the month of April offering an average yield of 3.73%, while bank CDs are stuck at 1.1%...
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Rating agencies and preferred stock investors, while using different methods, usually judge the investment risk of a preferred stock with very little disparity. Preferred stocks that are viewed as having similar risk frequently have similar yields - same risk, same reward.
But that is not the case with this group of 96 similar preferred stocks. Looking at Moody's Baa3 investment grade level, you can see that there is no agreement whatsoever between the market and Moody's...
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Deleveraging of corporate equity, regardless of industry segment, shows no sign of letting up. The breakneck pace of new preferred stock issues that we have seen over the last several months continued unabated during March 2013.
The 20 new preferred stocks issued during March 2013 bring the year-to-date total to 53 new issues - a bumper crop for preferred stock investors to pick from. But by the time most preferred stock investors knew of these new issues the market price had jumped well above their $25 par value...
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The idea that European banking officials might adopt a new bailout model, where the central banks of struggling countries are required to seize portions of citizen's savings accounts, pushed preferred stock market prices up in the U.S. right along with their common stock cousins. Over the first quarter of 2013, the average market price of U.S.-traded preferred stocks increased by $0.23 per share to $25.67, up from $25.44 at the end of 2012.
The new bailout ("bail-in") model saw its first test in Cyprus. Predictably, those lined up at ATM machines on the tiny island quickly sucked the machines dry and the run on banks promptly resulted in outright closures...
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New preferred stocks are being introduced at almost twice the pace as last year. Beginning with ALL-B from Allstate Corp. on January 3, there have been 31 new issues so far this year (through February). That's almost 16 new issues per month compared to an average of about 9 new issues per month during 2012.
While this bumper crop affords an increase in choices to consider, some preferred stock investors are concerned about potential future price decreases eroding their principal. There are several strategies for adding a layer of principal protection to a preferred stock investment but purchasing for the lowest possible price is a common thread...
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