There seems to be quite a few knowledgeable investors here on this site and I would like to ask for your opinion of my recent moves. My Stable Value fund reduced its dividend which cut my income from that source by about $5,000/ year. To compensate, I bought $150,000 of the preferred stocks of WFCPRN (Wells Fargo), GSPRI (Goldman Sachs), JPMPRA (JP Morgan), AGNCP, and NLYPRC which in total they average a yield of a little less than 6%, which is about 4% higher than the Stable value Fund was paying. I am now back to my regular earnings, actually a bit higher, but how much risk have I taken? It seems that before the major banks/brokers stop paying on their preferred stock that we would have to have another utter financial melt down. Am I missing something? It does not feel that risky to pick up "free money." This seems too easy.
Did your check the "yield to worst" on those preferreds???
for example JPMPRA is trading at 25.97 , your current yield is 5.24 but your yield to worst, that is if they call it in 2018 would only be 4.49% GSPRI current 5.684 but if called in 2017 you would only yield 4.80 for the period.
please keep this in mind.
I was lucky. I bought JPMPRA at $25.52 before the ex-date. I picked up the $.34 dividend and watched the price immediately go up nicely. I also picked up WFCPRN at $25.52 and watched it promptly rise to $26.18 and it will be kicking off a $.325 dividend in about two weeks. On GSPRI I bought at $25.85 and will lose $.85 if it is redeemed, but I'm up $.28 so far this month. I do thank you for reminding me to keep the impact of the stock being called in mind. I have read where people buy trusts that are only going to last another year or two and pay prices that will not even provide for a return of their capital, but they just see the big yield and buy without thinking (or maybe understanding). Thanks again for helping other posters with very accurate and needed information.
Iokuok, I would divide the amount of Preferred into big bank, insurance, utilities and REIT. I would limit REIT to 10%-15%. During the 2008 crash holders of Bank of America Preferred did not lose a red cent unless they sold. I do believe that in a crash REIT Preferred might be the first to fall.
Currently 18% of my preferred is in reits. However, I plan to sell the reit preferred stock first, as needed for monthly income, and so that percent should go down each month. And so if reits are ok for the next two years then I am ok... and safer as time goes by.
I hope I not being sucked in by the idiot poster harassing this board.
Anyways since you are using the term 'stable value'; I am assuming this is an institutional fund offering in an investment plan. Obviously you have a brokerage link type of account that allows security purchases.
Did you understand how the stable value offering worked? Stable Value funds by nature usually employ wrapped contracts in an attempt to insure against credit risk loss. This is similar to how a guaranteed investment contract works. By switching to individual preferreds you have added credit risk and just from the fact that preferreds generally have negative convexity you have added additional risk to rising rates.
Since you presumably can purchase individual securities I think it may have been better to buy a preferred ETF or two. Preferred offerings have tended to be mainly in financial companies, lessor in utilities and even lessor in old line material/industrials and integrated oils.
I have clients whose 401Ks and 403 plans eliminated their 'Stable Value Fund' offerings.
The Stable Value fund which is in a 401k used to pay out around a 5.5% yield. It is down to 1.6% now. PFF and JPC are good preferred funds and I have owned them both. It just seems that going with the big banks I mentioned would have very little default risk and really big price swings would be unusual. I don't see rising rates as a problem for right now. It is really terrible having to go out on the risk curve. I see this ending badly for many retired people who may take too much risk and that is what scares me.. Thanks for your thoughts. Any other options you can recommend?