Disclosure: This article is my own opinion. I have no business relationship with any company whose stock is mentioned in this article. This is for informational purposes only and not a recommendation to neither buy or sell securities nor imply any tax opinion.(More...)
With so much uncertainty surrounding the market right now, my recent focus for my personal account has been bank preferreds. As I outlined back in September, there are a number of banks that are going to continue paying dividends because of their strong balance sheets (despite the interest rate pressure that they are under that is driving profitability lower). Many of these banks have issued Traditional Preferred Stock (versus Trust Preferred Stock, or TruPS) that will continue to be treated as Tier 1 Capital. My investment thesis has been to invest in banks that have continued to pay dividends on their common stock, that have solid Tier 1 Capital ratios, and have a strong business mix.
The biggest outstanding question surrounding bank preferreds right now is the tax treatment of dividends. Many bank preferreds are only taxed at 15% (whereas other preferred stocks can be taxed as normal income). If the tax code that allows these preferred stocks to be taxed at 15% expires, the after-tax yields on these positions will be worse than they currently are and they will look less compelling when compared with preferred stocks that currently are not taxed at 15% (preferred stocks of Mortgage REITs, for example). This means that the prices may decline in order to keep the returns competitive.
Monthly Performance
To track the performance of the bank preferred market I look at three ETFs - PowerShares Financial Preferred (PGF), PowerShares Preferred (PGX) and iShares S&P US Preferred Stock Index (PFF). The bank preferred market was slightly down for the month of November, which was in line with the overall market - the Dow was down by 1.565% (207 points) and the S&P 500 was down by 0.799% (11.4 points). As you can see from the below chart, the bank preferred market was not subject to the same volatility that was seen in the greater
New Issues in the Month of November
It was a fairly busy month for new issues in bank preferreds as seven banks came to market with new securities.
Oriental Financial Group (OFG), 7.125% Series D Non-Cumulative Perpetual Preferred Stock
City National Corporation (CYN), 5.50% Series C Non-Cumulative Perpetual Preferred Stock
EverBank Financial Corp (EVER), 6.75% Series A Non-Cumulative Perpetual Preferred Stock
Wells Fargo & Company (WFC), 5.125% Series O Non-Cumulative Perpetual Preferred Stock
First Republic Bank (FRC), 5.625% Series C Non-Cumulative Perpetual Preferred Stock
Taylor Capital Group (TAYC), 8.00% Series A Non-Cumulative Perpetual Preferred Stock
We are also writing to offer to co-host an informational liaison of support for individuals to educate them on Preferred Managed Account(s).
Our advisory will work in a holistic manner with your Attorney or Tax Professional to explain the use of our Preferred Managed Account(s) ; explaining the use of “Preferred’s in the income planning for individuals, Trusts and Retirement Account(s).
It is in our opinion that a Preferred Managed Account provides superlative tax control, consistent (exceptional) Dividend/interest income, with the potential of capital gains in comparison to high risk dividend driven common-stock, annuities, and over-priced corporate bonds.
It is likely, even in the 2013 tax levels, the after-tax result potential would still be superior to most income driven (Higher Beta) dividend drive equity, and high-upfront commission driven and rear load annuities, with a few exceptions.
If you plan to make or consider a second opinion regarding your income requirements, desiring to minimize your risk, while receiving “Prudent,” fiduciary guidance to your own efforts.
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RIAs typically use institutional custodians—generally large brokerage firms or banks—to hold and safeguard their clients’ stocks, mutual funds and other assets. These custodians also provide important infrastructure services such as executing trades and preparing monthly brokerage statements for clients. This helps an RIA focus on understanding your needs and providing the best advice possible. Visit www.riastandsforyou.com for more information.
Please request our (12 page report in (PDF) about our Preferred Managed Account(s). You can always feel free to contact the advisory for a free no-obligation consultation.
Email me at; mgreen@tgacapitalmanagement.com or call for more detailed information and I thank you for reading this letter.
Michael D. Green, Principal
TGA Capital Management
508-224-9646 ~ 888-686-6778
This is not a solicitation nor recommendation to buy or sell a securities nor to imply any tax or legal advise, always seek a registered investment advisor to attain your risk/averse attitude and investment suitability before investing. All information is considered accurate and reliable, however, due to changing market, economic, taxation, institutional, and other pertinent potential cycles and variations, future results cannot be guaranteed by past performance and should be monitored on a continual periodic systematic basis to provide current advisory recommendations that meets the client short-term potential deviations and management disciplined style, while advisory provides solely long-term recommendations.