Severe economic disruptions such as those caused by the financial crisis of 2007/08 and the Covid-19 pandemic today, while inflicting untoward human sufferings, do provide unique investment opportunities.
This announcement discusses substituting preferred stock for bank CDs and money market accounts to hold reserve cash balances and portfolio funds that are short term in nature.
Preferred stock is a relatively unknown, compared to bonds and stock, issuance by businesses to raise funds. It is a hybrid of debt (lacks voting rights) and equity (not deductible for tax purposes) sharing characteristics of both. Business entities may wish to issue it to avoid breaking covenants on the debt size and diluting corporate control on the equity side. Its par value is usually $25 per share.
Preferred stock usually pays a fixed dividend amount on a quarterly basis, but some payments are variable by contract. Before the 2007/08 crisis most preferred stock issues were cumulative meaning that if a dividend was missed all arrears had to be paid prior to common stock dividends being paid. Since then, primarily due to Federal Reserve decrees relative to banks which are significant issuers of preferred stock, this provision is rarer.
Corporate purchases of another entity’s preferred stock carry tax advantages not available to individual investors, but individuals may benefit from lower taxes on qualified dividends and special exclusions on REIT payments which further enhance preferred stock returns.
What is the special attractiveness of preferred stock during times of economic upheavals? Common and preferred stock values plunge during these times which provides an opportunity for cautious investors to
purchase high yielding preferred stock for liquid balances at substantial discounts. The subsequent annual returns may exceed, by multiples, those of bank CDs and money markets returns even in normal times. Investors should be apprised, however, that even high quality preferred stock does not carry the FDIC insurance of banks.
If interested in pursuing this discussion further, please press the contact button to provide your contact information and I will respond appropriately.