What Income Investors Should Know

Below we provide information on a variety of subjects involving income investing that should be of interest to both newer income investors and very possibly to experienced investors. If you have any comments about the information below or any other similar questions about income investing, please email us via our Feedback form or directly to QuantumOnline61@gmail.com and we will happy to add them to this page.

Preferred Ticker Symbols and Names

If you haven’t already read the information on our Preferred Ticker Symbols and Names page, please do. It will save us both a lot of questions and problems in the long run.

The SEC has done an excellent job of explaining what happens to a company and their investors during a corporate bankruptcy. To see the SEC’s discussion on their website, click on the underlined What Every Investor Should Know about Corporate Bankruptcy .

What the yield is for a preferred stock can be confusing as it depends on circumstances. Let’s consider the J.P. Morgan Chase Capital XIV 6.20% Capital Securities, Series N trust preferred (ticker symbol JPM-Y). The 6.20% value included in the security name is the Coupon Rate which is the same value included in the QuantumOnline tables and descriptions. The basic use of the coupon rate is to determine the annual distribution of a security. If you take the $25.00 Liquidation Preference of JPM-Y and multiply it by the 6.20% (0.062) you come up with the annual distribution for JPM-Y of $1.55 per year. Preferred stocks are a fixed income security. The term fixed income means the dividend distribution is fixed and will not vary while the security remains outstanding. In other words, JPM-Y will pay $1.55 per year and this payment will not vary while the security remains outstanding (unless the issuer decides to defer or not pay the dividend which they will not do without very serious consideration).

Another yield term you need to understand is Current Yield. While the dividend of a preferred remains fixed, the market price of a preferred stock does not. The current yield measures the yearly distribution of a security against the current market price. To determine the current yield, you divide the fixed yearly dividend by the current market price and multiply by 100 to get the current yield in percent. For example, if JPM-Y is selling for $27 the current yield would be 5.74% ($1.55 divided by $27 times 100). At a market price of $23, the current yield would be 6.74% ($1.55 divided by $23 times 100). The primary value of current yield is to indicate that your actual yield in percent from your investment in a preferred stock actually depends on the current market price.

Three other yields involved with preferreds and other fixed income securities are Yield to Call (YTC). Yield to Maturity (YTM) and Yield to Worst (YTW). You can click on the underlined terms above to see our glossary definitions for these terms. These are terms that are of importance to sophisticated investors looking to get every penny of income from their investments. For the less sophisticated investor, you might just remember that if the current market price of a security is above the liquidation preference of a security your long term actual yield will be slightly less than the current yield while if the market price is below the liquidation preference, the actual yield will be slightly above the current yield.

QuantumOnline does plan of offering Yield to Call (YTC) and Yield to Maturity (YTM) information in the future but at this point we can’t say exactly when it will be. In our case, we first have to find a source of affordable current price quotes that we can use on the website and as the basis of the YTC & YTM calculations before we can even begin the programming on the yield information. We also have to find some good formulas for making the yield calculations that do not unduly slow down the loading of our tables.

We also do not know of any other website that offers YTC and YTM information or even YTC and YTM calculators. One suggestion we have in this regard is that some of the Financial Calculators (Hewlett-Packard, Texas Instruments, etc.) do offer YTC and/or YTM calculations. A second suggestion is that it is our understanding that Excel spreadsheets also offer YTC and/or YTM calculations but we have never attempted to confirm this ourselves.

The term redemption date is used in IPO prospectuses while the common usage in the security industry is the Call Date which is just another name for the redemption date. The redemption date (which is normally set at 5 years from the date of issue on newer preferreds) is the date when the company has the OPTION to redeem (or call) the preferred — if they want to. The redemption date is virtually always specified as the date on or after which the company can redeem but is not required to redeem the preferred stock. Once the call date has passed, the company may call the security at any time at their option. If they do redeem the preferred, they will do it at the redemption amount specified in the IPO prospectus issued when the stock was first sold. Recently most preferreds have been issued with a redemption (or call) price equal to the liquidation preference (issue price). In other words, a preferred issued at $25 would be redeemed (called) at $25, no matter what the market price of the preferred is prior to the redemption or call date.

I would definitely recommend that any new investor go to our Preferred Stocks table, pick out a preferred that might interest you, and click on the Prospectus link provided on most recent preferreds. You don’t have to read the entire prospectus (that generally runs 50 to 100 pages) but looking over the first five or ten pages and studying the section that gives a summary of the provisions of the new preferred issue would be time well spent. You might also just glance over the remainder of the prospectus to see what other information is provided which is often mainly boiler plate.

Specifically, what happens when a preferred stock matures is exactly what the IPO prospectus said would happen at maturity. In virtually all cases, what happens is that the liquidation preference amount (generally equal to the original purchase price paid at the IPO), plus any accrued and unpaid dividends, is returned to the holder of the security. Note that the amount returned has NOTHING to do with the market price prior to maturity date. The holder of the security will normally be paid the specified liquidation preference at maturity.

This is where the term yield to maturity comes in. For example, let’s take an 8%, $25 (liquidation value) preferred stock which is selling for $26.00 one year before maturity. The preferred will pay 8% or $2.00 during its final year and then will pay the holder $25. Overall, the preferred will pay $2.00 in dividends but lose $1.00 in value during the year for a yield to maturity of 4%. The same preferred selling for $24 one year before maturity would pay $2.00 in dividends, gain $1.00 in value and would have a yield to maturity of 12%. Tax considerations can effect these calculations but are a separate issue.

www.sec.gov/answers/dividen.htm

Have you ever bought a stock only to find out later that you were not entitled to the next cash or stock dividend paid by the company? To determine whether you should get cash and most stock dividends, you need to look at two important dates. They are the record date or date of record and the ex-dividend date or ex-date.

When a company declares a dividend, it sets a record date when you must be on the company’s books as a shareholder to receive the dividend. Companies also use this date to determine who is sent proxy statements, financial reports, and other information.

Once the company sets the record date, the stock exchanges or the National Association of Securities Dealers, Inc. fix the ex-dividend date. The ex-dividend date is normally set for stocks two business days before the record date. If the record day is not a business day when the stock markets are open, the ex-dividend date is set from the first business day prior to the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

Here is an example:

Declaration Date

Ex-Dividend Date