Preferred stock vs. cd vs. common

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outdoorguy
Posts: 21
Joined: Sun Aug 10, 2014 10:07 pm

Preferred stock vs. cd vs. common

Post by outdoorguy » Thu Dec 06, 2018 9:35 am

Looking for some advice regarding preferred stocks in electric utilities. I am am currently retired living very well off pensions. My ira holding are mostly in 12 quality electric companies. I’m investigating moving toward preferred stocks in this sector versus common. I’m not interested in voting rights, and believe the increased yield will out perform growth. Thinking about eventually moving @ 250k in this direction. I also have @ 170k in cds. Which I will leave intact. The question is should I move holdings from common to preferred stocks in the utility sector. Thank you for your comments.

Valuethinker
Posts: 36614
Joined: Fri May 11, 2007 11:07 am

Re: Preferred stock vs. cd vs. common

Post by Valuethinker » Thu Dec 06, 2018 9:48 am

outdoorguy wrote:
Thu Dec 06, 2018 9:35 am
Looking for some advice regarding preferred stocks in electric utilities. I am am currently retired living very well off pensions. My ira holding are mostly in 12 quality electric companies. I’m investigating moving toward preferred stocks in this sector versus common. I’m not interested in voting rights, and believe the increased yield will out perform growth. Thinking about eventually moving @ 250k in this direction. I also have @ 170k in cds. Which I will leave intact. The question is should I move holdings from common to preferred stocks in the utility sector. Thank you for your comments.
Preferred stocks are stocks, not fixed income. The movement in preferred stock funds over 2008-09 should convince you of that, if you plot it against a CD equivalent (US Treasury bond funds), investment grade corporate bond funds, and an equity fund like Vanguard Total Stock Market.

You will rank behind all debt on the companies' balance sheets. This is a big step up in risk from corporate bonds, let alone CDs.

outdoorguy
Posts: 21
Joined: Sun Aug 10, 2014 10:07 pm

Re: Preferred stock vs. cd vs. common

Post by outdoorguy » Thu Dec 06, 2018 10:02 am

Thank you for commenting on my proposal.
I failed to mention my wife has about 180k in in bonds and cds also. I’m thinking my overall risk may be reasonable. Could you comment on your thoughts of the holdings of the utilities common stocks and possibly moving them toward preferred securities for yield? Thanks for you review.

Theoretical
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Re: Preferred stock vs. cd vs. common

Post by Theoretical » Thu Dec 06, 2018 5:16 pm

Preferred stocks get you the limited upside of bonds without the significant debtor covenants. If you strictly want income, I'd strongly prefer junk bonds over preferreds, all things being equal, especially the fallen angel types that have more covenants.

not4me
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Re: Preferred stock vs. cd vs. common

Post by not4me » Fri Dec 07, 2018 10:19 am

outdoorguy wrote:
Thu Dec 06, 2018 9:35 am
Looking for some advice regarding preferred stocks in electric utilities. I am am currently retired living very well off pensions. My ira holding are mostly in 12 quality electric companies. I’m investigating moving toward preferred stocks in this sector versus common. I’m not interested in voting rights, and believe the increased yield will out perform growth. Thinking about eventually moving @ 250k in this direction. I also have @ 170k in cds. Which I will leave intact. The question is should I move holdings from common to preferred stocks in the utility sector. Thank you for your comments.
I wanted to make sure I understand -- are you talking about changing from common to preferred stock of the same company within an IRA? My comments will assume yes. That means the difference in tax treatment wouldn't affect you & your credit quality isn't a major concern (in my opinion -- I say that because most states have strong enough regulations that they won't have a major utility really go bankrupt & the different place on capital structure isn't huge here).

Still, I find it hard to make a generic recommendation, but would suggest you review the individual prospectus. All preferreds aren't the same & may have different "options" that might negatively affect you. Sometimes they can be tied to certain projects (new power plant, etc) that might jeopardize just that share class. They'll likely have call dates & if you've bought at a premium you might sustain a loss without the ability to take it off on your taxes. I'd lean toward a preferred that is currently at a discount & was issued for "general operation". I would assume you won't get significant price appreciation on a preferred. However, you might also want to check out that companies bond offerings to see if they have even higher yield & maturity date to suit you. As others have pointed out, there are differences between preferreds & debt -- but for any given utility I don't know it will be as significant as in general terms. I also don't know if difference in yield will matter that much to be honest, but it might. That's where you have to do your research.

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