Expert: Jay Kay - 7/8/2008

Question
Jay
We are retired - age 67 - with a good sized portfolio but very small pension and social security - so we need current income.  Over the past 6-9 months we have been buying preferreds.  Probably $300K in 12 issues - mostly A rated but all investment grade, mostly banks, insurance companies and freddie mac, yield is approx 7.5% and with the current market most are underwater vs purchase price.

Question is, given the current market how safe an investment are they and is any action warranted.  Bond yields are just too low for the income we desire - although we do have a similar dollar value in bonds.

Second question, is we are selling our vacation home up north (if it sells anytime soon) and should we invest additional funds into preferreds.

Answer
The safety of each preferred issue (along with its possible exposure to calls - which you did not mention) is of course not uniform, but since you characterize them as investment grade you should not anticipate a problem in that regard.  The average 7.5% yield was satisfactory to you when you bought the preferreds, so unless there has been a dramatic change in your circumstances, it should be satisfactory now.  The market prices of such securities and their accompanying yields (like those of bonds) will fluctuate, but since you evidently have no intention of selling them, you continue to receive your 7.5%.  As you are well aware, the bonds will eventually mature, whereas the preferreds will not, so inflation is a prime consideration.  It is unsettling to find such securities now selling for less than you paid for them (and thereby yielding more), but this is what any "income investor" has to deal with.  As to whether the proceeds from a sale of your vacation home should be invested in preferreds, that once again involves a consideration of safety, yield and level of personal income needed.  You can buy more of what you already have and obtain a higher yield from the lower market price, or you can purchase preferreds that are lower than investment grade in order to generate more income.  I sense that the latter is not something you would be comfortable with in either preferreds or bonds, but it is offered as a possibility, not necessarily a suggestion.

In summary, I conclude that your investment grade preferreds are safe.  That is no guarantee, but their market price fluctuates more because of the movement of interest rates than as a result of business conditions.  Some banks, as we know, are in a special category these days.

If you decide on further purchases of preferreds, get the ticker symbols of some likely candidates and research the shares beforehand on an excellent Web site: www.quantumonline.com

I hope that my reflections have been of some value to you.