What to do with inherited Preferred Stock @ WF

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Burg
Posts: 1
Joined: Mon Apr 08, 2019 12:08 am

What to do with inherited Preferred Stock @ WF

Post by Burg » Mon Apr 08, 2019 1:39 am

Some basic background:
Desired asset allocation: 70% stocks / 30% bonds
Tax rate: 35% federal, 11% state, married filing jointly
Emergency funds are covered, job status pretty stable
Total portfolio in 7 figures
Tend to follow Boglehead approaches, especially in my primary taxable account (retirement accounts spread across a variety of accounts without an ideal selection of funds)

Just inherited from an older relative a taxable account with primarily preferred stocks at Wells Fargo. I do not need the money immediately but want to simplify while taking the best investment course forward. The amount of the account is <10% my total worth but is about 25% of my taxable assets.

Since preferred stocks seem a poor investment choice (not clear on why I would consider thinking otherwise??), I am trying to figure out the best way forward. However, I have only begun learning about preferred stocks and am uncertain of various details regarding their sale, etc. Options seem to be:
(1) Liquidate everything at WF and invest proceeds at Vanguard
(2) Transfer account in kind from WF to Vanguard and liquidate everything to re-invest in appropriate funds
(3) Transfer account in kind from WF to Vanguard and selectively liquidate some of the preferreds while holding some of the preferreds for awhile (any reason to do this?)

The preferreds have a variety of call dates (some already passed, which leads me to conclude that if they haven't been called they must be sub-par returns now?), investment grade ratings, etc. A few have conversion options, but most do not.

Thoughts or suggestions? Thanks!

The preferred stocks are listed below with investment value relatively evenly spread across them:
Preferred Stock Moodys/S&P
AMERICAN HOMES 4 RENTPFD 5.88% AMH.G NR / BB
ASPEN INS HLDG 5.63% PERPTL AHL.D Baa3 / BBB-
AT&T INC 5.35% PFD TBB Baa2 / BBB
BANK OF AMER 6.625% PFD BAC.W Baa3 / BBB-
BANK OF AMERICA 6% PFD BAC.B Baa3 / BBB-
BANK OF AMERICA 7.25% BAC.L Baa3 / BBB-
BELDEN INC 6.75% PFD BDC.B NR / BB
BRAEMAR HOTELS 5.5% PFD BHR.B NR / NR
BRIGHTSPHERE INVT 5.13% PFD BSA Baa2 / BBB-
CBL&ASSOC PPTYS6.625%PFD CBL.E NF / B-
CHESAPEAKE ENERGY 4.5% CHK.D NR / CCC+
CHS INC 7.50% PFD CHSCL NF / NF
CHS INC 7.875% PFD CHSCO NF / NF
DOMINION ENERGY INC 6.75% PFD DCUD Baa3 / BBB-
DTE ENERGY CO 6.5% PFD DTV Baa1 / BBB
FEDERAL REALTY INV TRPFD 5.00% FRT.C Baa1 / BBB
GAMCO NAT RES 5.20% PFD GNT.A A2 / NF
HERSHA HOSP TR 6.50% PFD HT.D NF / NF
KEMPER CORP 7.375% PFD KMPA Ba1 / BB
KIMCO REALTY CRP 5.25% PFD KIM.M Baa2 / BBB-
METLIFE INC 5.625% PFD MET.E Baa2 / BBB
NUSTAR ENERGY LP 9.00% PFD NS.C Ba3 / B1
PEBBLEBROOK 6.3% HTL PFD PEB.F NF / NF
PENNSYLVANIA REIT 6.88% PFD PEI.D NR / NF
QTS REALTY TRUST INC 7.125% PFD QTS.A NR / B-
QWEST CORP 6.50% PFD CTBB Ba1 / BBB-
RPT REALTY 7.25% PFD RPT.D NR / NF
SCE TRUST VI 5.00% PERPTL SCE.L Ba1 / BB+
SEMPRA ENERGY 6% PFD SRE.A NR / NR
SPIRIT REALTY 6.00% PFD SRC.A Ba1 / BB
STRATS TR FOR 7% PERPTL GJV NV / A
TELEPHONE&DATA 7% PERPTL TDJ Ba2 / BB
UNUM GROUP 6.25% PFD UNMA Baa3 / BB+
US CELLULAR 7.25% PFD UZC Ba1 / BB
US CELLULAR CORP 7.25% PFD UZB Ba1 / BB
VIRTUS INVESTMENT 7.25% PFD VRTSP NR / NR
VISTRA ENERGY CORP 7.00% PFD DYNC NR / NR

jbranx
Posts: 1544
Joined: Thu Feb 09, 2017 6:57 pm

Re: What to do with inherited Preferred Stock @ WF

Post by jbranx » Mon Apr 08, 2019 2:10 am

Welcome to the Forum. The Wiki here has a good overview of preferreds: https://www.bogleheads.org/wiki/Preferred_stock.

I have experience investing in preferreds and can say that while they have some characteristics of bonds, they frequently have durations that are perpetual, decline dramatically when rates rise, seldom have high ratings, get issued and called when they are advantageous to the corporation, and seldom provide the upside of stocks. In other words, your caution about them is warranted.

I would consult Vanguard for their advice on a transfer and on whether it would be best to liquidate there or at your current broker. If you want to do a bit more research on the call features, par, the prospectus,etc., a good online source is www.quantumonline.com.

You can also enter the topic at the search box at the top of the page and get more opinions here. My assumption is that tax-wise you have a stepped up basis? My suggestion would be to liquidate them all and follow the suggestions for a Three-Fund portfolio: viewtopic.php?t=88005.

(Just fyi, Vanguard once had a preferred mutual fund and closed it.)

Valuethinker
Posts: 39215
Joined: Fri May 11, 2007 11:07 am

Re: What to do with inherited Preferred Stock @ WF

Post by Valuethinker » Mon Apr 08, 2019 3:02 am

Burg wrote:
Mon Apr 08, 2019 1:39 am
Some basic background:
Desired asset allocation: 70% stocks / 30% bonds
Tax rate: 35% federal, 11% state, married filing jointly
Emergency funds are covered, job status pretty stable
Total portfolio in 7 figures
Tend to follow Boglehead approaches, especially in my primary taxable account (retirement accounts spread across a variety of accounts without an ideal selection of funds)

Just inherited from an older relative a taxable account with primarily preferred stocks at Wells Fargo. I do not need the money immediately but want to simplify while taking the best investment course forward. The amount of the account is <10% my total worth but is about 25% of my taxable assets.

Since preferred stocks seem a poor investment choice (not clear on why I would consider thinking otherwise??), I am trying to figure out the best way forward. However, I have only begun learning about preferred stocks and am uncertain of various details regarding their sale, etc. Options seem to be:
(1) Liquidate everything at WF and invest proceeds at Vanguard
(2) Transfer account in kind from WF to Vanguard and liquidate everything to re-invest in appropriate funds
(3) Transfer account in kind from WF to Vanguard and selectively liquidate some of the preferreds while holding some of the preferreds for awhile (any reason to do this?)

The preferreds have a variety of call dates (some already passed, which leads me to conclude that if they haven't been called they must be sub-par returns now?), investment grade ratings, etc. A few have conversion options, but most do not.

Thoughts or suggestions? Thanks!

The preferred stocks are listed below with investment value relatively evenly spread across them:
Preferred Stock Moodys/S&P
AMERICAN HOMES 4 RENTPFD 5.88% AMH.G NR / BB
ASPEN INS HLDG 5.63% PERPTL AHL.D Baa3 / BBB-
AT&T INC 5.35% PFD TBB Baa2 / BBB
BANK OF AMER 6.625% PFD BAC.W Baa3 / BBB-
BANK OF AMERICA 6% PFD BAC.B Baa3 / BBB-
BANK OF AMERICA 7.25% BAC.L Baa3 / BBB-
BELDEN INC 6.75% PFD BDC.B NR / BB
BRAEMAR HOTELS 5.5% PFD BHR.B NR / NR
BRIGHTSPHERE INVT 5.13% PFD BSA Baa2 / BBB-
CBL&ASSOC PPTYS6.625%PFD CBL.E NF / B-
CHESAPEAKE ENERGY 4.5% CHK.D NR / CCC+
CHS INC 7.50% PFD CHSCL NF / NF
CHS INC 7.875% PFD CHSCO NF / NF
DOMINION ENERGY INC 6.75% PFD DCUD Baa3 / BBB-
DTE ENERGY CO 6.5% PFD DTV Baa1 / BBB
FEDERAL REALTY INV TRPFD 5.00% FRT.C Baa1 / BBB
GAMCO NAT RES 5.20% PFD GNT.A A2 / NF
HERSHA HOSP TR 6.50% PFD HT.D NF / NF
KEMPER CORP 7.375% PFD KMPA Ba1 / BB
KIMCO REALTY CRP 5.25% PFD KIM.M Baa2 / BBB-
METLIFE INC 5.625% PFD MET.E Baa2 / BBB
NUSTAR ENERGY LP 9.00% PFD NS.C Ba3 / B1
PEBBLEBROOK 6.3% HTL PFD PEB.F NF / NF
PENNSYLVANIA REIT 6.88% PFD PEI.D NR / NF
QTS REALTY TRUST INC 7.125% PFD QTS.A NR / B-
QWEST CORP 6.50% PFD CTBB Ba1 / BBB-
RPT REALTY 7.25% PFD RPT.D NR / NF
SCE TRUST VI 5.00% PERPTL SCE.L Ba1 / BB+
SEMPRA ENERGY 6% PFD SRE.A NR / NR
SPIRIT REALTY 6.00% PFD SRC.A Ba1 / BB
STRATS TR FOR 7% PERPTL GJV NV / A
TELEPHONE&DATA 7% PERPTL TDJ Ba2 / BB
UNUM GROUP 6.25% PFD UNMA Baa3 / BB+
US CELLULAR 7.25% PFD UZC Ba1 / BB
US CELLULAR CORP 7.25% PFD UZB Ba1 / BB
VIRTUS INVESTMENT 7.25% PFD VRTSP NR / NR
VISTRA ENERGY CORP 7.00% PFD DYNC NR / NR
Preferred stocks trade a bit like junk bonds (sub investment grade) rather than equities. I am not sure if these credit ratings are for the prefs or for the company as a whole? BBB- is the bottom of investment grade.

If something goes wrong, preferred stock holders may well lose their dividend. And if the business goes bankrupt pref holders will usually lose most or all their money.

Valuethinker
Posts: 39215
Joined: Fri May 11, 2007 11:07 am

Re: What to do with inherited Preferred Stock @ WF

Post by Valuethinker » Mon Apr 08, 2019 7:00 am

I should add that one of Larry Swedroe's books takes you through preference shares.

The basic conclusion is you are getting an inferior risk-return tradeoff vs. holding corporate bonds (for more safety) or stock (for more upside).

I would add that companies that issue preferred stock tend to be of higher risk than ordinary companies (which simply borrow money from the bond market).

Exception is financial companies. Regulators allow them (sometimes) to count preferred stock towards their equity rather than their debt (bonds + deposits, generally). Thus they issue preferred stock to avoid direct dilution of holders of the ordinary stock. That's the reason Warren Buffett made his bailout investments (into GE & Goldman Sachs in particular) in the form of preference stock paying, IIRC, 10% (better terms than the US government). But Buffett also preserved his upside - his preference stock was convertible into ordinary stock if the stock price went up. He was basically taking a (good) bet that GE & Goldman Sachs would not go broke, and that the presence of his name as an investor would improve their position (it did).

Sadly we cannot invest on the same terms as Warren Buffett ;-).

Skiandswim
Posts: 119
Joined: Tue Dec 21, 2010 3:24 pm

Re: What to do with inherited Preferred Stock @ WF

Post by Skiandswim » Mon Apr 08, 2019 7:07 am

You mentioned you just inherited the preferred stock. Has the account at WF been put into you name or are the assets still in the Estate? I am assuming the account has been transferred to your name at WF. Some limited experience with a relatives WF investment accounts. There can be a series of quarterly and annual fees on top of any transaction fees. The fees increase if the account was transferred as WF Advisor status.

The BH Wiki supports you assumption that holding preferred stock is not desirable : https://www.bogleheads.org/wiki/Preferred_stock

I would personally transfer to Vanguard / Fidelity (low cost brokerage), verify you have the correct cost basis step-up (if this applies) recorded, and liquidate to reinvest as per your portfolio requirements.

GreenGrowTheDollars
Posts: 432
Joined: Fri Dec 18, 2015 11:09 pm

Re: What to do with inherited Preferred Stock @ WF

Post by GreenGrowTheDollars » Mon Apr 08, 2019 8:46 am

I would transfer and then sell. Charges at WF for transactions and account management can add up. Bigly.

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