Crazy thing is this- many preferred shares are issued by below investment grade companies. This below investment grade rating turns away many investors looking to buy preferred stock. Yet, many of these same investors invest in these same companies via common stock without checking their credit rating. And the common stock has greater price fluctuation and no guarantee of a dividend during financial hardship. PS only really appeals to income investors. Growth investors have no business with PS. If you buy preferred stock of investment grade companies at or below par, then there is no need to worry. Just collect a nice dividend until it’s called. Also, you mentioned missed dividends do not have to be repaid. That’s incorrect. Shares that are sold as ‘Cumulative’ will be paid all missed dividends once dividends resume. There is no guarantee of that with common stock.
Thanks for this video. Been in the stock market for the past 14-15 yrs. What I've learned is that these risks with preferred shares, or any kind of risk, don't matter that much in the long run. The very reason I am in stocks is because I embrace the risks -- all those you mentioned, especially credit risk, and many more. Otherwise, I'd be in bonds or money market like a small man begging for guarantees. But, hey, good topic you got there, because it makes middle-class people like me want to argue and be heard and be right, and most of all, make us watch your videos in the process🫰 New subscriber here.
I am with you on everything except the asymmetric risk/return profile. What you are saying is true in theory, but I don't see it in practice. Take PFF for instance, it's yield is nearly always within one or two percent of Long-Term BBB Corporate Bonds. Furthermore, 80% of the change in yield of PFF is correlated to the change in yield of these corporate bonds. It appears, at the fund level, I am not seeing this asymmetric risk. But perhaps I am not looking at it correctly. By the way, I determined the yield on LT BBB bonds by taking the 30-yr T-bond rates and adding the BBB credit spreads. I would be very interested in any data you have that speaks otherwise. Thank you.
@@OptimizedPortfolio Thank you for the response. I am not sure I understand what you are saying. We know the duration of a preferred is about equal to the inverse of its yield even though it has perpetual maturity. Therefore, I think yield is the leading and most significant factor. However, rather than argue theory, I decided to compare the returns of PFF to a Long-Term Corporate Bond ETF (I chose Vanguard's VCLT). I did a scatter plot of returns on VCLT verses the returns on PFF. I looked at one-month, three-month, six-month, one-year, and three-year returns. Apples to apples. Total Returns to Total Returns. Nothing fancy. Again, I truly do NOT see a "capping" of the returns on PFF compared to corporate bonds. Given your claim, I would expect positive returns of PFF to fall off (i.e. be "capped") when short-term returns on long-term bonds are high (i.e. interest rates probably falling). But I don't see it...at least nothing of significance. You are not the only one making the same claim. I am just trying to determine if there is a bit of crowd following here, or if it is real. But I do NOT see it at the fund level. Perhaps they don't hold enough callable or variable rate preferred stocks to make it show up at the fund level? I don't know. Please understand me, I seek to understand. I am NOT seeking to challenge you nor provoke you in anyway. You are a super smart guy with tons of knowledge. I was just hoping you could help me see what I am missing or maybe had some data I could read? I agree with your claim when owning individual preferred stocks. But again, I did NOT see it materialize in PFF when I reviewed its history since inception.
@@dennis6325 I think the salient comparison is not just corporate bonds, but rather stocks and bonds, and maybe specifically stocks and treasuries. As usual, I think we'd want to look at the portfolio holistically and how preferreds [might] fit in it. We may even get a better idea of the specific risk exposure by regressing a factor model onto these funds. I know Swedroe has written quite a bit on this topic and would have much better explanations and answers than me. Let me see if I can track down his literature, but in the meantime maybe Google his name in relation to the subject. I suspect it's in some of his books on my bookshelf and may not be entirely online. He used to pop up in the Bogleheads forum so I wouldn't be surprised if he has some comments there on the topic as well.
@@OptimizedPortfolio Good news. I decided to compare returns on PFF to VGLT (Vanguard's Long-Term Treasury Bond ETF). I looked at 3-month, 6-month, one-year and three-year returns. I think the one-year returns showed the concept the best. I could clearly see the returns on PFF are directly correlated to treasuries when they are doing poorly (negative returns). But when treasuries produce large positive returns over the short-term, PFF does not follow suit. In fact, the positive returns of PFF are not only capped they fall off with further increasing positive returns of treasuries. I finally see exactly what you claimed. I just learned something very valuable. Won't forget it. Thank you for your patience and insight
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Crazy thing is this- many preferred shares are issued by below investment grade companies. This below investment grade rating turns away many investors looking to buy preferred stock. Yet, many of these same investors invest in these same companies via common stock without checking their credit rating. And the common stock has greater price fluctuation and no guarantee of a dividend during financial hardship. PS only really appeals to income investors. Growth investors have no business with PS. If you buy preferred stock of investment grade companies at or below par, then there is no need to worry. Just collect a nice dividend until it’s called. Also, you mentioned missed dividends do not have to be repaid. That’s incorrect. Shares that are sold as ‘Cumulative’ will be paid all missed dividends once dividends resume. There is no guarantee of that with common stock.
Thanks for this video. Been in the stock market for the past 14-15 yrs. What I've learned is that these risks with preferred shares, or any kind of risk, don't matter that much in the long run. The very reason I am in stocks is because I embrace the risks -- all those you mentioned, especially credit risk, and many more. Otherwise, I'd be in bonds or money market like a small man begging for guarantees. But, hey, good topic you got there, because it makes middle-class people like me want to argue and be heard and be right, and most of all, make us watch your videos in the process🫰
New subscriber here.
I owned PGX a while back, not too bad of a holding.
How is your PGX stocks? I am planning to buy this for the dividends.
Thanks for sharing!
Appreciate all the work you do.
Thanks, Chris!
Great video! I don't invest in preferred etfs. Buying more FNILX,Vti,vxus and leverage etfs today.
Thanks for sharing!
Get ahead of the curve and buy PFF before Fed drops rates. Get the dividend and big share gains.
Thanks for watching!
I am with you on everything except the asymmetric risk/return profile. What you are saying is true in theory, but I don't see it in practice. Take PFF for instance, it's yield is nearly always within one or two percent of Long-Term BBB Corporate Bonds. Furthermore, 80% of the change in yield of PFF is correlated to the change in yield of these corporate bonds. It appears, at the fund level, I am not seeing this asymmetric risk. But perhaps I am not looking at it correctly. By the way, I determined the yield on LT BBB bonds by taking the 30-yr T-bond rates and adding the BBB credit spreads. I would be very interested in any data you have that speaks otherwise. Thank you.
Again, callability and perpetual maturity. Yield is not the only factor. This may not be immediately apparent/visible at a glance.
@@OptimizedPortfolio Thank you for the response. I am not sure I understand what you are saying. We know the duration of a preferred is about equal to the inverse of its yield even though it has perpetual maturity. Therefore, I think yield is the leading and most significant factor. However, rather than argue theory, I decided to compare the returns of PFF to a Long-Term Corporate Bond ETF (I chose Vanguard's VCLT). I did a scatter plot of returns on VCLT verses the returns on PFF. I looked at one-month, three-month, six-month, one-year, and three-year returns. Apples to apples. Total Returns to Total Returns. Nothing fancy. Again, I truly do NOT see a "capping" of the returns on PFF compared to corporate bonds. Given your claim, I would expect positive returns of PFF to fall off (i.e. be "capped") when short-term returns on long-term bonds are high (i.e. interest rates probably falling). But I don't see it...at least nothing of significance. You are not the only one making the same claim. I am just trying to determine if there is a bit of crowd following here, or if it is real. But I do NOT see it at the fund level. Perhaps they don't hold enough callable or variable rate preferred stocks to make it show up at the fund level? I don't know. Please understand me, I seek to understand. I am NOT seeking to challenge you nor provoke you in anyway. You are a super smart guy with tons of knowledge. I was just hoping you could help me see what I am missing or maybe had some data I could read? I agree with your claim when owning individual preferred stocks. But again, I did NOT see it materialize in PFF when I reviewed its history since inception.
@@dennis6325 I think the salient comparison is not just corporate bonds, but rather stocks and bonds, and maybe specifically stocks and treasuries. As usual, I think we'd want to look at the portfolio holistically and how preferreds [might] fit in it. We may even get a better idea of the specific risk exposure by regressing a factor model onto these funds.
I know Swedroe has written quite a bit on this topic and would have much better explanations and answers than me. Let me see if I can track down his literature, but in the meantime maybe Google his name in relation to the subject. I suspect it's in some of his books on my bookshelf and may not be entirely online. He used to pop up in the Bogleheads forum so I wouldn't be surprised if he has some comments there on the topic as well.
@@dennis6325 This also might show up in measures of tail risk like kurtosis.
@@OptimizedPortfolio Good news. I decided to compare returns on PFF to VGLT (Vanguard's Long-Term Treasury Bond ETF). I looked at 3-month, 6-month, one-year and three-year returns. I think the one-year returns showed the concept the best. I could clearly see the returns on PFF are directly correlated to treasuries when they are doing poorly (negative returns). But when treasuries produce large positive returns over the short-term, PFF does not follow suit. In fact, the positive returns of PFF are not only capped they fall off with further increasing positive returns of treasuries. I finally see exactly what you claimed. I just learned something very valuable. Won't forget it. Thank you for your patience and insight
Great content, new sub here. What are your thoughts on preferred now that interest rates are on a steep rise?
Thanks! No change. I own bonds.
Today (Mar13, 2023) PGX took a big hit. Do you know why?
Div payment? Not sure.
preferreds are 50% of my port folio . i like preferreds]
Thanks for watching!