Published: November 6, 2009
The
correct answer is
(A.) Preferred Stocks
Buffett capitalized on the chaos in
the financial sector by investing $5
billion in Goldman Sachs' (NYSE:
GS) perpetual preferred shares.
With a 10% fixed yield, the
investment stands to throw off $500
million in annual dividends for
years to come. And if Goldman buys
back the shares, it must fork over
an additional +10% premium. Buffett
later invested $3 billion in
General Electric's (NYSE: GE)
preferred shares.
This is hardly the first time that
Buffett made bold, calculated bets
on these unique, tax-advantaged
securities. In fact, he stunned the
market by pouring hundreds of
millions into 9% convertible
preferred shares of Salomon Brothers
just before the crash of 1987, and
then collected dividends while
common stockholders got steamrolled.
Of course, the rest of us aren't
going to negotiate the same
favorable terms as Warren Buffett --
but that doesn't mean we can't take
a page out of his playbook. After
all, preferred dividends are far
more durable than common share
dividends, which can be more easily
slashed or discontinued. Preferred
shares also have a higher claim on
assets than common shares in the
event of liquidation.
However, last year was anything but
ordinary, particularly for financial
firms. Rattled investors dumped
their shares and depository
institutions flooded the market with
newly-minted preferreds to
strengthen their weakened balance
sheets. Naturally, that gush of
supply overwhelmed an already
fragile market. As with any
supply/demand imbalance, prices went
sharply lower, which sent yields
shooting in the opposite direction.
Since then, investors have realized
that the sky isn't falling and the
threat of a systemic collapse has
been averted. Confidence and
liquidity have sent prices higher in
the preferred stock sector, but many
issues still trade at sizeable
discounts, so the already rich
yields could be sweetened by
additional appreciation. This is an
opportune time for investors to
begin putting this stable,
income-generating class to work.
That's why StreetAuthority editor
Nathan Slaughter has scoured the
market for standout preferred ETFs
that make for a nice portfolio
addition. In the latest issue of the
ETF Authority newsletter,
Nathan explains which ETFs offer the
outstanding plays in preferred and
takes a closer look at the newest
entrant to this field in his
"Favorite New Fund" section. To
learn more about The ETF
Authority,
please click here.
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