General Stock Investment Strategies/preferred stock dividends
I currently hold several preferred stocks in the energy section. I purchased them at a price below the issue value of 25 dollars with I am the intent to hold them forever or until they were called as both my wife and I are 65 and retired, with a pretty large monthly income from our other investments and rental properties. However, this week the value of these preferreds have falling greatly, if the companies stop paying the dividends which are clumlative will the stocks become worthless or will they regain a value once oil prices start to rise. Can a preferred stock lose all its value if the common stock and the company do not go bankrupty? Any advice would be of value.
Merideth, thanks for your question. Within preferred stock listings, whether viewed online or in print, you'll find quite a few categories of securities. Many of the $25-par ones are not traditional preferreds but rather hybrid income securities cooked up by investment bankers (trust preferreds, MIPS, QUIPS, etc.).
Why this matters is that you'll only know a given security's potential for going to $0 by researching the specific security and understanding what backs its payments, and where it "sits" in priority if the company goes bankrupty. A very useful site for doing this is quantumonline.com. Unfortunately, preferreds require a lot of work given the wide mix of security types - that site gives summaries but you may need to read long prospectuses to get a real understanding of the risks of each.
It's not too surprising that the recent dive in oil prices, accompanied by the dive in common stocks of many oil-related companies, has also resulted in big drops in similar preferreds. That may indicate the potential for long-term losses, but it may also just reflect the illiquidity of the securities themselves. The same thing happened to financial-sector preferreds when the housing bubble popped. And similarly, some of those rebounded while others lost significant value or went to zero, because they were backed by assets that no longer had much value.
I'd suggest researching your holdings one by one to get an understanding of what each one is. It may be that you hold true preferreds from relatively stable companies, and your main risk is a temporary suspension of dividends. As stock it could go to zero, but that may be unlikely. At the other side of the spectrum might be the oil exploration companies that issued a lot of high-yield debt (read: junk bonds) to finance operations, assuming $100 oil to cover costs including interest. Perhaps some of that wound up on the preferreds list, as $25-par income securities - I don't know.