zxcvbob wrote:
- quote -

Bob,
This is so specific to the issuer, I don't think there's a general
answer on this one. Preferreds can definitely be called if it's
mentioned in the propectus, and will be called if it's considered
expensive capital relative to alternatives, or with some issues, in the
event of a reorganization.

The latter may be more of a concern with financial companies, which are
frequently the subject of mergers and acquisitions. A recent example is
MBNA. If you have the 6/30 (or 7/1?) newspaper, check out the top
winners/losers columns for NYSE stocks. MBNA common stock was one of the
leading gainers, because that was they day it was announced that they're
being acquired. But one of the MBNA preferreds (series A) was one of the
big losers on the same day, presumably because the market thinks it'll
get called ("presumably" - I don't follow the issue).

I don't think I'd buy RBS without really understanding their whole
capitalization scheme - the split between the common and all those
preference share series. And I'd verify the tax treatment of the
payments, both WRT the 15% rate and any holdback for foreign tax. I
think you're right that it gets the 15% rate and there's no foreign tax
withholding but I'm not sure about either.

Generally though it's very unusual to find a "free ride" with
preferreds. If the current stated yield looks substantially higher than
alternative issues, it means there's some additional risk there and you
need to figure out what it is, and decide whether it's worth it. If it
may be called, figure out the yield to call to see if that's acceptable.
And as with any other type of investment, diversification across issues
is important. A nice thing with preferreds is that you can diversify a
bit more easily than you can with corporate bonds, which often trade in
bulky/large units, and have limited inventory available for purchase in
retail investing accounts. Not that there are exactly a ton of
preferreds out there but there are some issues where an individual
investor is unlikely to find the bond from a company, but can buy a
trust preferred through any retail brokerage account.

-Tad

Tad Borek wrote:
- quote -

I think was an article in SmartMoney recently on preferred stocks where
it was stated that companies usually call their bonds before their
preferred stock. I don't know if this generalization is valid, but an
investor could try to determine if the issuer has recently called other
debt or preferred stock.

"zxcvbob" <zxcvbob[at]charter.net> wrote
- quote -

Like you, I'd be interested in what someone who does have specific
experience (with hybrid-issuing companies redeeming their issues) can share.

I agree with your concern above. What does make sense to me is to factor in
what interest rates are doing to figure out how likely it is that the bank
would redeem the particular hybrid issue. Companies surely must redeem
hybrids such as this at times, as part of a rational, financial,
decision-making process. There must be calculations of call risk available,
though certainly this must already be reflected in the price of the hybrid
at any time.

- quote -

But I think your earlier reasoning on this point makes sense: They suspend
dividends, and their credit reputation is at risk.

- quote -

I trust you are watching RBS-I's price move around. You and I both noted a
few months ago a dive in hybrid prices. They've come back up. So, as I'm
sure you know, but for gambling newbies, you could maybe wait and see if
RBS-I goes back down again to something closer to 25. I'm sure you noticed
its 52-week low was 25.20.

I see finance.yahoo is not very good with recent historic prices of hybrids.
I'm having more luck with marketwatch.com . It shows, for example that
RBSPRI (same as RBS-I) has closed above 25 every day since about 2001.

- quote -

That rate does not sound competitive. Just for your reference, IIRC Fidelity
charges no more than $20 for up to $10k of secondary market bonds. I should
think it might pay to shop around a little for a second, more competitive
brokerage house.

Or consider Certificates of Deposit. Lower yield, I know, but often not by
much these days, and you want a diversity of bonds/CDs, too, right?

- quote -

I don't like investment grade bond funds (over about medium term) right now,
either. I have a CD ladder instead, whose rungs I will happily fill in with
high grade corporate bonds when CDs don't seem competitive. Some of the CDs
in the ladder are one-time adjust-a-rate or step up.

- quote -

For sure.

- quote -

Particularly if stocks are going to be flat awhile.

If I were in your shoes and so planning for the long term, I think I'd skip
the hybrids and instead go with a mix of REITs and a CD ladder. The REITs
have a bit of risk, but not as much as hybrids, in my crude, DIY-er
estimation. Plus, the principal is far more likely to increase over time
(whereas with hybrids principal won't increase much and has a good
probability of declining). Of course, you'd have to consider the tax
implications of REITs. As you may know, REIT dividends generally don't
qualify for the 15% tax rate.

I'm writing this from memory, so double check what I say here. Or others
will chime in with suggestions.

- quote -

A little related aside, then:
Do you know about IRS Rule 72(t)? It says one can withdraw money from a
retirement plan such as an IRA or 401k _without penalty_ anytime before age
59.5 as long as one withdraws a sum based on one's life expectancy annually
for at least five years or until age 59.5, whichever is later. Or that's the
gist of it. Kind of a nice supplement to any emergency plan one may have, or
those considering a very early retirement. Here's a site that can introduce
you a little to Rule 72(t): http://www.lpl.com/calculators/Retire72T.html

Thanks for the reply.

Elle wrote:
- quote -


I'm really just learning how to invest in bonds and hybrids. What I'm
concerned about is that either RBS redeems RBS-I soon after I bought it
and I take a capital loss (it's currently trading at about $26, with a
par value of $25.) So I could pay 26 for it and immediately have it
redeemed at 25 and I would lose 4%.

Or the opposite extreme; they might skip (or even suspend) dividends and
without cumulation and no maturity date they would never have to make up
the unpaids.

Of the 2 risks, I'm more concerned about them redeeming the shares.

- quote -

I have too much % of my money in cash and too much in common stocks and
equity mutual funds. I'm trying to diversify into bonds a little, but
my broker charges a $50 commission to buy or sell bonds (waived for
original issue.) I don't like bond funds. Since this is a taxable
account, the 15% tax rate is a good thing.

Overall, I'm looking for capital appreciation rather than income, but I
see nothing wrong with achieving a significant portion of that
appreciation via interest payments and dividends that I reinvest in new
equities.

BTW, I'm 45 years old, and longevity runs in my family. As a computer
programmer, I have to be prepared for a forced very early retirement (my
coworkers are dropping like flies and my time will come eventually), so
a lot of my retirement funds have to be in nonqualified accounts.

Best regards,
Bob

"zxcvbob" <zxcvbob[at]charter.net> wrote
about the preferred stock RBS-I , as listed at quantumonline.com , for one
- quote -

No one's responding, so here are a few of my meager observations of the last
year or so:

Aren't you partly reassured by the fact that, if RBS does redeem RBS-I, it
does so at the par value PLUS unpaid dividends?

- quote -

But other hybrids (that is, those securities that behave partly like a bond,
partly like common stock) typically have maturities some 30 years away,
right? Since my life expectancy at the moment is about 38 years, these
maturity dates 30 years away are like having no maturity date.

- quote -

I think we talked a little about hybrids before. Last week I was reading an
article that said IIRC that hybrids should be seen in pretty much the same
way as long-term corporate bonds. (It might even have said 30-year corporate
bonds or treasuries.)

Do you have a more general goal for holding hybrids, other than enjoying a
15% tax rate now and then? Do you have, for example, a specific percentage
of your portfolio reserved for them?

I have decided that, unless either
(1) I would be happy with the hybrid's yield for the next 30 years; or
(2) I want to roll the dice and use hybrids to bolster my income a bit for
awhile, hoping that I'll be able to redeem them at some point for more than
I paid. But if one is not prepared to lose some money, don't do this.

then I should not bother with them. I happen to be doing just a small amount
of (2) at the moment, but only for the last seven months or so. (Plus
several months of reading before that.) I'm slowly selling my hybrid
positions off as their price exceeds what I paid plus the commission, and
transferring the proceeds to dividend growth stocks. Obviously, I took a
risk. The price has at times fallen somewhat from what I paid. But so far,
so good. For what seven months or so of experience actually holding several
positions is worth. Probably the next time I could justify holding them is
when I'm in my late 70s or so and am converting stocks to more bonds, to
increase yield in the remaining years of my life and preserve principal
should I have to go into ugh long-term care.

I had a hybrid position with RBS not long ago. I trust you realize it's an
enormous bank/financial institution with good ties to other reputable
financial institutions. Hence the investment grade rating on its hybrids.

I'm looking at QuantumOnline again, this time at real preferred stocks
-- specifically A rated noncumulative bank stocks, like RBS-I. I'm
wondering what the call risk is; this particular issue has been callable
for almost a year, and RBS has other issues with higher dividend
payments that are also currently eligible to be called.

Who has experience with these, and has it been a *good* experience? I
don't like the noncumulative part, but assume a bank would not risk its
credit rating by missing a payment. Also I don't like that there's no
maturity date, OTOH the dividends are eligible for the 15% tax rate and
that's what I'm looking for...

Best regards,
Bob