Preferred Stocks – Banks and Insurance Issues
By: Tim McPartland,
This page is specific to preferred stocks of banks and insurance companies.
Banks and Insurance companies ALMOST always pay qualified dividends (tax advantaged). On the other hand they are no longer allowed to issue cumulative or it will not be counted as Tier 1 equity.
From this page you can start your research on Preferred Stocks. With current prices and yields you should be able to select a few that appear to meet your yield requirements and risk profile.
- Preferred shares are shares issued by a corporation as part of its capital structure.
- Preferred stock have a ‘coupon rate’ — the interest rate you will be paid. This interest rate remains constant on most–but not all, preferred issues. A small number of issues have a rate that ‘floats’, based upon a baseline such as Libor.
- Dividends are either cumulative—Cumulative means that dividends continue to accrue if they have been suspended, but they are not paid until the company decides to pay them after suspension or non-cumulative. Non Cumulative means they do not continue to accrue (they are gone forever). In either case if the dividends are suspended the company is likely in deep financial trouble.
- Banks and Insurance companies no longer issue cumulative preferreds. For preferred stock to count as Tier 1 capital for the company it must be non-cumulative.
- Dividends are generally paid quarterly, although a few pay them monthly.
- Preferred shares normally carry no voting rights (unlike common shares).
- Preferred shares generally have NO maturity date (most are perpetual).
- Most Preferred Stocks have an optional redemption period in which the shares may be redeemed, at the issuers option, generally this is 5 years afer issue, but may be more or less.
How do You Buy Preferred Stocks?
You buy Preferreds just like you would any stock. Put in an order in your brokerage account and wait. The prime difference with preferred stocks is most trade very ‘thin’ (little volume) so you should always use ‘limit’ orders or you may pay way more than is necessary for your shares.
Yield to Call Assumptions
The Yield to Call numbers shown should be viewed as approximate. If the issue is trading below par the YTC is always positive, if the issue is trading above par the YTC is always negative when past the 1st call date. This is because the assumption is that a callable issue (past the 1st call date) will be called the next available day (tomorrow). This is because we have no way to know when/if actual call day may arrive. Additionally our formula does NOT pick up accrued dividends at this point in time so the YTC shown is off by 0 to 1.5%. For issues past their first call date this also represents Yield to Worst (YTW)
If the issue is not past the first possible call date the YTC shown should be very close to correct and can be considered YTW also.
To get more information on preferred stocks, screen them, set up your own portfolio and receive email alerts, go to www.preferred-stock.com now.