23. Calculate Yield to Call and How to buy Preferred Stock
Preston Pysh is the #1 selling Amazon author of two books on Warren Buffett. The books can be found at the following location:
In this lesson, we learned about the www.quantumonline.com website. This website is the best online preferred stock resource. It’s free to belong to and it provides the most organized results for finding a potential company to buy. (Disclaimer: BuffettsBooks.com has no affiliation with this website).
It is the recommendation of BuffettsBooks.com that investors focus on the following types of preferred shares:
Cumulative preferred Vs. Non-Cumulative Preferred
Designated term Vs. a Perpetual term
The Calculability of the preferred stock
The Adjustability of the interest rate
1. Look for Cumulative Preferred Stock: Cumulative shares will assure that the stock holder will eventually receive the dividend declared in the prospectus.
2. Call Date: Look for a Preferred Stock that has a Call Date that meets your expectations. If you simply want a short term holding location for your capital, then find a preferred share that has a call date within the time frame you’d like to liquidate the security. Although many preferred shares are not repurchased on their call date, others are.
3. Maturity Date: Many investors avoid preferred shares with no maturity date (especially when the economy is in a position with low interest rates). When a Preferred Share has no maturity date, the market price of the stock could continue to plummet if interest rates remain higher than the time the stock was purchased.
4. Assess the Company’s ability to make the payments: A really quick method for determining a company’s ability to make dividend payments is to look at the Moody’s or S&P rating. A more advanced method would involve looking at the common shares on the company and assessing its current debt loads and future earnings.
5. Read the Prospectus: Always, Always, Always read this document before you buy any Preferred Stock.
6. Assess the YTC: Once you find a company that meets all the criteria listed above, then you’ll want to take a look at the Yield you might receive from now until it’s callable. This is called the Yield to Call. As you can see, we’ve provided a calculator below that helps you determine this percent.
The important thing to remember when you’re calculating the YTC is that it doesn’t mean you’ll absolutely make that return. This is only going to give you an idea of what you would make on the investment if the issuer actually called the security on the call date and paid on the dividends by that date.