Issue #02

Preferred Stocks are an often overlooked asset class that usually produce solid, stabile returns. They are frequently overlooked because, like the ingredients in potato chips, they include confusing terms not familiar to many investors. Most Preferred Stock is “cummulative”, meaning dividends accrue, even if not paid on schedule. Most Preferred Stock is “redeemable” or “callable” meaning the issuer has the right to call (redeem) the shares after a stated date – frequently five years after issuance.

Preferred Stock is actually more of a bond, than a stock. They commonly pay a dividend that yields between 8 percent and 10 percent. Like bonds, preferred stock can rise and fall in price, which is usually has a par value of $25. Many companies that issue preferred stock have high and stabile cash flows such as real estate investment trusts. These companies choose to issue preferred stock, rather than bonds, because it improves their credit rating, and thus, enables them to qualify for better commercial property loans. Unlike a corporate bond, preferred stock is listed as equity on the balance sheet, and hence, the issuance of preferred stock does not degrade a company’s debt to equity ratio, which is a critical factor for corporations’ other financing activities.

We like to use preferred stocks in retirement accounts during periods of stable interest rates such as 2000-2004. In such periods client tend to earn annual returns between 7% and 10%. One reason that Preferred Stock often offers better yields than bonds is because few investors understand how preferred stocks work. Another reason that preferred yields are attractive is because the preferred stock universe is not large enough to accommodate the largest brokerage firms and the clients of their sales force. The income generated in a retirement account can compound tax-free.

Most preferred stock is not available in sufficient quantity after the initial offering, to be purchased in the open market and allocated to hundreds or thousands of client accounts of larger firms. This is one example of an advantage that the clients of a boutique money manager such as Barnes Capital has over financial consultants at Merrill Lynch and Smith Barney.

Daniel Barnes

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Thursday, June 15th, 2006 at 2:49 pm and is filed under Insight Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.