Has anyone on here invested in preferred stocks before?
I am not comfortable investing in corporate fixed income next year due to potential rate hikes.
However, I am not convinced the US and the world economies are out of the woods yet. So I'm not bullish on equities. I am curious to see how the market reacts when the Fed withdraws from MBS market next year.
That led me to the middle ground, preferreds.
Georgia Power has one yielding 5.5% (GAH)
National Bank of Greece has one yielding 10.4% (NBGpA)
Pros? Cons?
"Georgia Power has one yielding 5.5% (GAH)
National Bank of Greece has one yielding 10.4% (NBGpA)
Pros? Cons? "
Well for one, prferred's get hurt like bonds do when rates rise. And are you aware of what's happening with greece? that preferred of yours is non cumulative....
I've purchased a good many bank preferreds and volume can be rather low even on big banks. I've found you have to sell them into a strong market or you'll never get rid of them. It doesn't take much to move them.
How strong of a market do you need to sell them? I'm guessing there were some large spreads last year.
I think that the interest rate risk might be balanced out the lower default and liquidity risk associated with a bull market. The only other FI instrument I can think of that holds its own during a bull market is GNMA's since prepayment risk goes down in a rising rate environment.
I think that Greece is worth a small portion of the portfolio (~3-4%) considering all the negative attention is sending yields higher there. As long as it does not default, then there's an opportunity there. I highly doubt the EU will let one of its own default.
"The only other FI instrument I can think of that holds its own during a bull market is GNMA's since prepayment risk goes down in a rising rate environment. "
Prepayments might decline, but you will still get hurt as rates rise. Who wants to hold a pool of 5% mortgages when rates are at 9%?
The duration is actually not that bad on GNMA's. The returns were still above treasuries during the 03-07 bull market (http://moneycentral.msn.com/investor/partsub/funds/returns.asp?Funds=1&…).
I hold them as the risk-less part of my portfolio. In my opinion, they are the best asset that the US Government explicitly backs currently. Anyone have any other suggestions for risk-less assets?
Jimbo has a very valid point. Although the prepayments decline, anything with a lower rate will get crushed as rates soar. Most people forget interest rate risk when considering fixed income vehicles.
It doesn't matter whether it's muni's treasuries, corporates, when rates take off, no one wants to get stuck holding lower yielding paper.
To answer your question about the market strength it varies really, but it is important there is a buyer prevalent. If there is any negative sentiment about the health of the banks or unanswered questions, it will be hard to unload them in times of uncertainty. That being said, all the bank preferreds I owned continued paying their dividends that were often greater than 10%.
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