Hold 50% WFC.PL and 50% in BAC.PL

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invest2bfree
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Hold 50% WFC.PL and 50% in BAC.PL

Post by invest2bfree » Wed May 20, 2020 5:22 pm

Current Portfolio-
Joint Account: $ 2.45Million
Retirement 401k: $1.3Million self directed

I split the amount into both the preferred stocks yielding about 5.5%.
Male 45 years, single earner, kids 10,7,7. Not a secure job but make around 200k a year.

My reasoning is that I would get $208k in qualified dividends each year.

Both the preferreds are perpetual with conversion into common unlikely in the foreseeable future. In case I lose my job the dividends would be good enough for me without worrying about the market volatility.

Also if I dont lose my job I plan to invest in VT, progressively build my Equity portfolio.

retired@50
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by retired@50 » Wed May 20, 2020 5:55 pm

Have you seen the wiki page on preferred stock?

https://www.bogleheads.org/wiki/Preferred_stock

From the page:
For the reasons above, investment in preference stock is usually not recommended. The risk-return trade-offs are unfavorable for individual investors and those seeking corporate credit risk exposure are better advised to invest in corporate bond funds, whilst those seeking equity upside are advised to invest in diversified index funds made up of common stock (like Vanguard Total Stock Market).
Regards,
This is one person's opinion. Nothing more.

Topic Author
invest2bfree
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by invest2bfree » Wed May 20, 2020 6:44 pm

I disagree, Preferreds of banks are different from corporate preferred.

bank preferred are like bonds and count towards common equity.

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grabiner
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by grabiner » Wed May 20, 2020 9:30 pm

invest2bfree wrote:
Wed May 20, 2020 6:44 pm
I disagree, Preferreds of banks are different from corporate preferred.

bank preferred are like bonds and count towards common equity.
That is how they work from a regulatory standpoint, but for you as an investor, they work the same as any other preferred stock. If a preferred stock does pay its dividends, it works like an infinite-maturity bond, with a duration the reciprocal of the interest rate. For example, if yields rise from 4% to 5%, you lose 20% of the value of your preferred stock. (And if there is inflation, the dividend on the preferred stock won't grow.) And you do have the risk that the dividend will not be paid; this risk is greater when the rest of your portfolio is down as well.

Even more important, you don't want to hold a large amount in a single corporation's security, whether common stock, preferred stock, or bonds; you risk losing both principal and dividends if something happens to that corporation.

With three kids, have you funded 529s for their college education? That will give you a lot more tax-deferred investment room. And you and your spouse should also have Roth IRAs (you'll need to use the backdoor Roth to do this).
Wiki David Grabiner

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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by SovereignInvestor » Wed May 20, 2020 9:42 pm

Writing off an entire asset class doesn't make sense. At the right prices preferred stocks are attractive.

Bank preferred usually have qualified dividends and are non cumulative so they County as equity so they yield less due to favorable tax treatment. REIT and utility preferred are often more diversifying with utilities not having as much systematic risk of financial world and many REITs having hard physical assets that provide good recovery in a bankruptcy.

Many issues are illiquid which is advantageous if bought well below par because they sell off a lot in quick panics which allows investor to get a good deal. The bank preferred tend to be the most liquid which provides not edge for individual investor.

One has to diversify themselves because the ETF soften buy high and sel into illiquid markets driving them low.

retired@50
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by retired@50 » Wed May 20, 2020 11:43 pm

I'm curious what you think about diversification? Do you think it's a myth or something?

You hold 50% of your assets in in B of A, and 50% in Wells Fargo. You've concentrated your risk into the financial sector. You stand behind the bond holders of each corporation, and you don't have the upside of common equity. I wouldn't recommend that you hold corporate bonds or common stock of only two corporations either. The only bonds that don't need diversification are U.S. Treasury bonds. I wish you well, but in my opinion you're taking a huge risk.

Regards,
This is one person's opinion. Nothing more.

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invest2bfree
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by invest2bfree » Thu May 21, 2020 2:43 pm

Valid question but my question to you is what are the chances of #2 and #3 Bank in US go Bankrupt.

These are now basically utilities and they did not suffer in 2008 which was a 100 year event for financials.

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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by rich126 » Thu May 21, 2020 3:12 pm

I have a decent amount of WFC preferred L. First bought it ~2008 when it was under par ($1000) but I wasn't good enough to get it near its low at $300. This recent crash I did buy more back around $1100 (can't recall the exact price). I don't have any of the BAC.PL and have no understanding of how that one works.

The WFC one was formerly Wachovia (par $1000, 7.5% dividend) and the conversion price of WFC-L is over $150 per WFC common share (not happening anytime soon to say the least).

I still wouldn't hold a very large position. I don't mind buying it when it drops close to $1000. I don't really invest in mutual funds and only a bit in indexes and don't mind have only ~10 stocks but I still don't want to go beyond 10-15% in a stock except in rare situations. None of them are going to zero over night so there is always time to get out of positions but nothing in life is a sure thing when it comes to investing.

Wells is having some rough times now. I doubt bankruptcy is in its future but low interest rates aren't kind to banking.

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invest2bfree
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by invest2bfree » Thu May 21, 2020 3:48 pm

The alternative in corporate bond is bad.
For 5% interest in 20+ year bond you only get garbage companies like HAL, CNQ, KHC etc providing you that kind of return.

Corporate bond market is extremely over valued.

My opinion is based on the interest rate environment these preferred are mis priced giving 5.5% with favorable tax treatment.

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invest2bfree
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Re: Hold 50% WFC.PL and 50% in BAC.PL

Post by invest2bfree » Fri May 22, 2020 10:58 am

http://www.philosophicaleconomics.com/2 ... ed-stocks/

Here is a nice writeup on this it is not by me but by some one else.

Goes into the uniqueness of the investments I am investeding in.

$WFC-L and $BAC-L: Two Unique Preferred Issues

Let’s now look at the two securities that will form the focus of the rest of the piece. The first security is a Wells Fargo 7.50% Series L convertible preferred issue (prospectus), ticker $WFC-L, or $WFC-PL, or $WFC/PRL, depending on the quote platform being used. The shares were originally issued as Wachovia shares in the early months of 2008. They became full-fledged Wells Fargo shares, ranking on par with all other Wells Fargo preferred issues, upon Wells Fargo’s acquisition of Wachovia in December of that year (8-K). The par value of each share is $1000, with each share paying out $18.75 per quarter in dividends, or $75 per year, 7.5%. The current market price is around $1220, which equates to a current yield (and YTW) of roughly 6.15%.

The shares are particularly unique–indeed, precious, in my opinion–because unlike almost all other preferred shares trading in the market right now, they are not callable by the company. Instead, they’re convertible. They come with a broad conversion option for the shareholder, and a limited conversion option for the company. For the shareholder, she can convert each share into 6.38 shares of Wells Fargo common stock at any time and for any reason. For the company, if the common shares of Wells Fargo appreciate substantially, it can force that conversion to occur. More specifically, if Wells Fargo common shares, currently priced around $58, exceed a market price of $203.8 (technically: $1000/6.83 * 130%) for 20 days in any 30 day consecutive trading period, then the company can force each preferred share to be converted into common at a 6.38 ratio. If that were to happen, shareholders would get 6.38 common shares, each worth $203.8 in the market, which amounts to a total market value per share of $1300, 130% of par.

It goes without saying that the company is unlikely to be able to convert the shares and get out of the deal any time soon. The market price of Wells Fargo common stock would need to more than triple from its current peak-cycle level. Even if we make optimistic assumptions about the future price growth of such a huge bank–say, 6% per year from current levels–a tripling will take at least another twenty years to occur. That’s great news for owners of the preferred shares–it means that they can expect to receive a tax-advantaged 6.15% yield for at least another 20 years. Additionally, if or when the conversion price is eventually reached, it’s not going to create a loss for current buyers. It’s actually going to create a small gain, because the shares are currently trading at a price below the $1300 that they would effectively be converted into monetarily.

The second security is a Bank of America 7.25% Series L convertible preferred issue (prospectus), ticker $BAC-L, or $BAC-PL, or $BAC/PRL. Like the Wells Fargo shares, these shares were issued in the early months of ’08, at a time when funding for financial institutions was become increasingly tight. In terms of their structure, they’re essentially identical to the Wells Fargo Series L shares, except for the numeric details, shown below:

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