preferred stocks

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Thomas93
Posts: 112
Joined: Sat Jan 16, 2021 6:19 am

preferred stocks

Post by Thomas93 »

From an asset location perspective is it advisable to put preferred stocks in a taxable account or tIRA?
User avatar
retired@50
Posts: 5489
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: preferred stocks

Post by retired@50 »

Thomas93 wrote: Sun May 02, 2021 9:51 am From an asset location perspective is it advisable to put preferred stocks in a taxable account or tIRA?
Based on the wiki page related to preferred stock, I think the answer is neither. :shock:

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

From the above link:
...Investment in preference stock is usually not recommended. The risk-return tradeoffs are unfavourable 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).
If you insist, then I'd suggest the tIRA.

Regards,
This is one person's opinion. Nothing more.
User avatar
CyclingDuo
Posts: 4210
Joined: Fri Jan 06, 2017 9:07 am

Re: preferred stocks

Post by CyclingDuo »

Thomas93 wrote: Sun May 02, 2021 9:51 am From an asset location perspective is it advisable to put preferred stocks in a taxable account or tIRA?
Depends on your household income and if the preferred is a qualified dividend to be taxed at the LTCG rate, or as ordinary income. Knowing all of that would help select location.

Good article here: https://www.simplysafedividends.com/int ... red-stocks

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
User avatar
grabiner
Advisory Board
Posts: 29700
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: preferred stocks

Post by grabiner »

CyclingDuo wrote: Sun May 02, 2021 12:54 pm
Thomas93 wrote: Sun May 02, 2021 9:51 am From an asset location perspective is it advisable to put preferred stocks in a taxable account or tIRA?
Depends on your household income and if the preferred is a qualified dividend to be taxed at the LTCG rate, or as ordinary income. Knowing all of that would help select location.

Good article here: https://www.simplysafedividends.com/int ... red-stocks
That article says that preferred stocks have low interest-rate risk, which is not correct. If a preferred stock pays its dividend, it behaves like an infinite-maturity bond, with a duration equal to the reciprocal of the yield. For example, a preferred stock at a share price of $25 paying $1 annually has a 4% yield, and a 25-year duration. If rates rise to 5%, the stock will fall to $20, a 20% loss. (The loss is less than 25% because duration decreases as yields increase.) This is comparable to the duration risk of a 30-year Treasury bond, and probably even riskier because preferred yields are more volatile.
Wiki David Grabiner
User avatar
CyclingDuo
Posts: 4210
Joined: Fri Jan 06, 2017 9:07 am

Re: preferred stocks

Post by CyclingDuo »

grabiner wrote: Sun May 02, 2021 3:48 pm
CyclingDuo wrote: Sun May 02, 2021 12:54 pm
Thomas93 wrote: Sun May 02, 2021 9:51 am From an asset location perspective is it advisable to put preferred stocks in a taxable account or tIRA?
Depends on your household income and if the preferred is a qualified dividend to be taxed at the LTCG rate, or as ordinary income. Knowing all of that would help select location.

Good article here: https://www.simplysafedividends.com/int ... red-stocks
That article says that preferred stocks have low interest-rate risk, which is not correct. If a preferred stock pays its dividend, it behaves like an infinite-maturity bond, with a duration equal to the reciprocal of the yield. For example, a preferred stock at a share price of $25 paying $1 annually has a 4% yield, and a 25-year duration. If rates rise to 5%, the stock will fall to $20, a 20% loss. (The loss is less than 25% because duration decreases as yields increase.) This is comparable to the duration risk of a 30-year Treasury bond, and probably even riskier because preferred yields are more volatile.
Agree that risk is involved. We use the Invesco Preferred ETF's focusing on the income produced, and not the underlying share price for the duration.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
rich126
Posts: 2602
Joined: Thu Mar 01, 2018 4:56 pm

Re: preferred stocks

Post by rich126 »

I think preferred stocks can be a good investment but you have to do your research. People sometimes don't research when they can be called and if you are paying a premium and it gets called at PAR then that isn't good.

I've held one long term and that is the Welss Fargo Preferred L, $1000 PAR, 7.5%. I was lucky to get it during the stock market crash back around 2008 and got it substantially under par value, maybe around $700. Since then it has jumped as high as $1500 and during the covid crash it fell back to around $1100 where I bought more.

It originally was from Wachovia and can't be called any time soon unless Wells Fargo stock goes through the roof. Since I'm not much of a bond holder, having something that pays a steady 7.5% interest works well for me. I probably should have bought more.
Topic Author
Thomas93
Posts: 112
Joined: Sat Jan 16, 2021 6:19 am

Re: preferred stocks

Post by Thomas93 »

If the preferred stock is callable and it gets called then for tax purposes is it as if I've sold it at the level at which it is called?
Karamatsu
Posts: 1367
Joined: Mon Oct 27, 2008 2:42 am

Re: preferred stocks

Post by Karamatsu »

Yes. It's just as if you had sold, except that (if I remember right) there's no broker commission.
Post Reply