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Making Money with Preferred Securities
(Continued)
Sections include:
Special Features of Preferred Stocks and Preferred Securities
Includes a discussion of debt-equity hybrids, dividends, call options, tax status.
Trading Characteristics
Exchange vs over-the-counter, pricing discrepancies, prices and yields vs stripped prices and yields, private placement, Rule 144A securities, a discussion of interest rate, call, and credit risks.
Tax Considerations
Reduced dividend tax rate (15%) for individual investors
DRD eligible preferreds
Tier 1 and Tier 2 capital requirements
The Types of Preferreds and how they trade:
Perpetual Preferreds
REIT Preferreds
Closed-End Fund Preferreds
Hybrid, Trust Preferreds
Repacks – repackaged securities
Non-U.S. Preferreds
Baby (Corporate) Bonds
Excerpts
Page 4.........
Stripped Prices: As a result of these noticeable pricing distortions, market professionals have developed a “clean” price, or one that factors out the accreted dividend payment from the quoted price ..... to compare prices of different issues.
Yields and Stripped Yields: Because preferred issuers do not pay dividends at the same time, comparing current yields could potentially mislead investors as to which preferred actually pays the most. While this could hurt some investors, this fact also offers investors the opportunity to profit from inefficiencies that inevitably occur due to this method of pricing and trading.
Page 5.........
144A-exempt preferreds can often offer superior yields with no more risk than many fully registered preferreds.
Page 9.........
Reduced Dividend Tax Rate for Individual Investors: Broadly speaking, only certain sectors of the perpetual and auction-rate preferred stock markets are eligible for the dividend income tax reduction.
Page 13.........
Baby Bonds: Full-blown debt instruments that make regular interest payments and often rank higher than traditional preferred stock.........trading in $25 denominations and traded on an exchange.........are popular with individual investors.
Page 15.........
Spreads between Preferreds and Underlying Bond Yields: An intriguing aspect of trust preferreds is how they trade in relationship with their underlying bonds.
Page 18.........
Key points about foreign preferreds: Issuers are usually large, solvent multinationals, whose finances are tracked by major brokerages and ratings institutions; financial issues are likely to be noncumulative.
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