Quick Guide To Using The CDx3 Bargain Table For Subscriber s To The CDx3 Notification Service By Doug K. Le Du
Doug K. Le Du Author, Preferred Stock Investing QUICK GUIDE TO USING THE CDx3 BARGAIN TABLE Chapter 7 of Preferred Stock Investing presents a method for selling a CDx3 Preferred Stock, during a period of increasing dividend rates, for a short-term capital gain. Specifically, Chapter 7 describes how a CDx3 Investor can purchase a newly issued CDx3 Preferred Stock and, within the first two dividend quarters, sell it before the Rule of Rate/Price Opposition pushes the market price down. But CDx3 Investors who are interested in a longer-term capital gain opportunity could simply wait to purchase a CDx3 Preferred Stock until after this drop in market price. This is especially true if dividend rates continue to increase and market prices continue to fall accordingly. Should market prices fall below $25.00, such conditions are referred to as a buyer s market high dividend rates available for dirt cheap market prices. The CDx3 Bargain Table, introduced to subscribers to the CDx3 Notification Service in April 2008 during the strongest buyer s market in history, lists CDx3 Preferred Stocks that are at point in time that, research shows, favors buyers. The purpose of this Quick Guide is to summarize how to use the CDx3 Bargain Table to identify purchase candidates during a buyer s market. High Yield Now, Nice Capital Gain Later Since CDx3 Preferred Stocks pay a fixed dividend amount to you, regardless of your purchase price, the lower your purchase price, the higher your actual return (called yield ). That is, the lower the market price goes, the higher your yield will be. For example, let s say that the annual going rate for the dividends being paid by new CDx3 Preferred Stocks is 8%. An 8% CDx3 Preferred Stock pays you $2.00 per year in dividend income (8% times $25), regardless of your purchase price. So if you could find a way to purchase this CDx3 Preferred Stock for, say, $23.00, you would actually be making 8.7% on your money ($2.00 divided by $23). 8.7% would be your actual yield on this investment. By using the falling market prices that occur during a buyer s market, you can boost your dividend yield well above the going rate. A second benefit is even more compelling. When dividend rates start to fall again, and market prices come back up, you have set yourself up for a spectacular capital gain opportunity. To continue our 8% example, if the going dividend rate for newly issued CDx3 Preferred Stocks decreases to, say, 7%, what do you think is going to happen to the market price of the 8%-er that you had purchased earlier for $23? It will tend to go up, of course. Compared to the 7% going rate offerings, the 8%-er you re holding becomes a very hot ticket which you can sell for a very nice capital gain (on top of the 8.7% dividend income that you ve been earning in the meantime). 2009 by Doug K. Le Du 2
Quick Guide To Using The CDx3 Bargain Table For Subscribers Built-In Buyer By taking advantage of the low market prices that occur during a buyer s market, CDx3 Investors (1) substantially boost their yield and (2) set themselves up for a nice capital gain once dividend rates start to fall again (and market prices head back up). But there is another mechanism that makes this approach even more attractive. Remember, this approach is applicable during a buyer s market, when dividend rates offered by newly issued CDx3 Preferred Stocks are increasing and market prices have fallen below $25 per share. As a CDx3 Investor, never forget that you always have a built-in potential downstream buyer for your CDx3 Preferred Stock the issuing company itself. As described on page 54 of Preferred Stock Investing, as rates fall, the issuing company of a CDx3 Preferred Stock that you purchased when rates were higher will usually call (purchase back from you at $25 per share) your shares on the call date. That is, the issuing company would rather issue a new CDx3 Preferred Stock at, say, 7%, than continue paying out the 8% that the older issue is costing them. So, as rates fall, issuing companies will tend to call their older, higher dividend paying CDx3 Preferred Stocks (once the call date arrives). To continue our earlier example, you were able to purchase a CDx3 Preferred Stock that pays an 8% annual dividend for $23. As rates fall off again, and the market price of your 8%-er rises accordingly, you will have opportunities to sell for a nice capital gain. As the call date approaches, with the going rate now lower than your 8%-er, the issuing company is likely to call your issue, and, as required, pay you $25.00 per share. This means that you have a built-in buyer for a nice $2 per share capital gain, should you choose not to sell prior to the call date. While there is no guarantee that the issuing company of a CDx3 Preferred Stock will call the issue, if dividend rates are lower than they were when your CDx3 Preferred Stock was introduced five years earlier, it pays them to do so when the call date arrives. Determining Purchase Candidates We want to identify candidate CDx3 Preferred Stocks that are most likely to be available for a relatively low market price the less we have to pay in order to make our purchase, the greater the capital gain (profit) opportunity is when it comes time to sell downstream. As explained throughout Chapter 7 of Preferred Stock Investing, during a buyer s market (increasing dividend rates, market prices below $25 per share), the market price of a CDx3 Preferred Stock will tend to fall within the first two dividend quarters. This creates a short-term capital gain opportunity for CDx3 Investors within the first two dividend quarters (six months). What this also means, however, is that as dividend rates continue to increase, we can often expect to find bargain basement market prices for CDx3 Preferred Stocks that are at least two quarters old. 3 2009 by Doug K. Le Du
Doug K. Le Du Author, Preferred Stock Investing So now you know when, during a buyer s market, to look for a great price CDx3 Preferred Stocks that have already completed their second dividend quarter. Is there such a thing as CDx3 Preferred Stocks that are too old? The Rule of Call Date Gravity says that if conditions favor a call the market price of a CDx3 Preferred Stock will tend toward $25 as the call date approaches starting about three years after the IPO date of a CDx3 Preferred Stock (about two years prior to the call date). As long as the market price of the CDx3 Preferred Stock that you are considering is less than $25.00 per share (a buyer s market ), you stand to make a capital gain (in the event of a call) by purchasing any time prior to the call date. So, during a buyer s market (dividend rates up, market prices below $25 per share), CDx3 Investors who are looking for a longer-term capital gain opportunity than that presented throughout Chapter 7 of Preferred Stock Investing could consider purchasing CDx3 Preferred Stocks that are at least two dividend quarters old but whose call date has yet to arrive. Identifying When To Buy Now that we understand which CDx3 Preferred Stocks are the best candidates, when does the best time to make a purchase (lowest market price) tend to present itself? Simple. The Rule of Buyer/Seller Behavior (Preferred Stock Investing, page 67) tells us that the market price of a CDx3 Preferred Stock will tend to rise during the dividend quarter. So the lowest prices tend to occur at the beginning of the dividend quarter. How do you find CDx3 Preferred Stocks that are (1) at least two quarters old, (2) whose call date has yet to arrive, (3) are available for less than $25 per share and (4) are just starting a new dividend quarter? Over the following pages I will show you how this is done, but as a subscriber to the CDx3 Notification Service the work is done for you. You simply receive the result each month the CDx3 Bargain Table. Example: Let s See How It s Done Let s see how to identify the CDx3 Preferred Stocks that are most likely to provide the best bargains during a buyer s market by using March 2008. The CDx3 Preferred Stocks that are shown on the March 2008 CDx3 Seller s Calendar are just ending one dividend quarter and beginning a new one (i.e. when their market prices would tend to be lowest). First, we ll use the CDx3 Seller s Calendar to spot the CDx3 Preferred Stocks that are at least two quarters old; then, with those candidates, we ll look up their market prices and see what kind of bargains are available. 2009 by Doug K. Le Du 4
Quick Guide To Using The CDx3 Bargain Table For Subscribers Step 1: Pick Your Candidates Here is the CDx3 Seller s Calendar that subscribers to the CDx3 Notification Service received on February 28, 2008: The table on the left of the calendar identifies the 27 CDx3 Preferred Stocks that had a dividend quarter ending during March 2008. Let s take a closer look at the first few entries. The column labeled Div Qtr identifies the age of each CDx3 Preferred Stock. While C-F, C-U and COF-B are at least two quarters old, C-G is not a candidate yet since it is just finishing its first dividend quarter. 5 2009 by Doug K. Le Du
Doug K. Le Du Author, Preferred Stock Investing Looking at the March 2008 CDx3 Seller s Calendar, there are 24 CDx3 Preferred Stocks that are candidates (at least two quarters old). We now have our candidates, just by looking at the CDx3 Seller s Calendar. For March 2008, these are the CDx3 Preferred Stocks that are most likely to have market prices that have been pulled down by the Rule of Rate/Price Opposition. These are the candidates that are most likely to be available at bargain basement prices during late-march/early-april 2008. Notice that the table is sorted by Moody s rating. By definition, all CDx3 Preferred Stocks are rated investment grade by Moody s Investors Service. Moody s investment grade category has ten subcategories as follows (strongest to weakest): Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3 Using the Moody s rating as a proxy for investment risk helps to identify candidates that best fit your personal risk tolerance. With the candidates identified, it is time to take a look at these bargain basement market prices that I ve been telling you about; time to see the Rule of Rate/Price Opposition in action (rates up, prices down). Step 2: Gathering Market Prices If we are correct, the Rule of Rate/Price Opposition should have pushed the market prices of these CDx3 Preferred Stocks (those at least two quarters old) down below $25 per share by the end of March 2008. Remember, the date that is indicated on the CDx3 Seller s Calendar for each CDx3 Preferred Stock is the dividend quarter end-date. To maximize our chances at the lowest purchase price, we want to consider the market price when our candidates are in the early days of the next (new) dividend quarter, after the end-dates shown on the calendar. So we want to gather our market prices during the days that follow the dates indicated on the CDx3 Seller s Calendar, when market prices of CDx3 Preferred Stocks will tend to be relatively low for the quarter (per the Rule of Buyer/Seller Behavior, Preferred Stock Investing, page 67). As seen on the above CDx3 Seller s Calendar for March 2008, the last of our candidates to start a new dividend quarter (when market prices tend to be lowest) is the Series G CDx3 Preferred Stock from Kimco Realty, KIM-G. KIM-G ends its second dividend quarter ( Q2 ) on March 27, 2008; therefore, KIM-G starts a new dividend quarter the next day Friday, March 28, 2008. So, by gathering the market prices of 2009 by Doug K. Le Du 6
Quick Guide To Using The CDx3 Bargain Table For Subscribers our 24 candidates on March 28, 2008, we can start to see where the bargains really are since all of our candidates will be in the early days of a new dividend quarter by that date. The March 28, 2008 closing market prices for our candidates have now been added to the table. Step 3: Identify Investment Objectives Taking a look at the market prices, you can see the Rule of Rate/Price Opposition in action. During a buyer s market, the Rule of Rate/Price Opposition has pushed the market prices of our candidates down well below the $25 par price. The next step is to determine which one(s), if any, to purchase. Which CDx3 Preferred Stock candidate is the best fit for your personal financial goals, resources and risk tolerance? Only you can answer that question. Different CDx3 Investors are going to have differing investment objectives. Some might want to steer their purchases toward the highest dividend income producers while others may favor longer-term capital gain opportunities, for example. But once we have the market prices, we can add a couple of columns that will serve to identify the real bargains even further. For example, for those who favor dividend income, we can add a column that shows the dividend rate that each of our candidate CDx3 Preferred Stocks pays. Once we have the dividend rate for each one, it is a very simple matter to calculate the yield discussed earlier (the return that you are actually making in dividend income). Here are our 24 candidates with columns showing their respective dividend rates and yields: 7 2009 by Doug K. Le Du
Doug K. Le Du Author, Preferred Stock Investing Note that I have highlighted the entries that rank in the top 10%; that is, since there are 24 CDx3 Preferred Stocks, the two top ranking entries are highlighted in each column, just to see them more easily. Now we are really getting somewhere. If you are looking for the best dividend income performers, they have just been identified for you. Before continuing with additional investment objectives to consider, it is important to point out that the results of this example are for illustration purposes only. Please do not take these results as recommendations to buy, or not to buy. Always gather additional and current information regarding investment alternatives prior to investing. You can see how your actual yield increases, when compared to the declared dividend rate, when the Rule of Rate/Price Opposition pushes the market prices of our candidates down below $25 per share. By purchasing CTZ-A, for example, at the March 28 price of $17.50, you actually increase your dividend income earnings by more than 3% above the declared dividend rate of 7.5%. Whether or not purchasing CTZ-A is an investment decision that is consistent with your personal goals, financial resources and risk tolerance is up to you, but this example shows you the type of opportunity that this approach can bring to CDx3 Investors. What if you are more interested in positioning yourself for the highest capital gain, rather than dividend income? Here is where we can use the built-in buyer that was described earlier. Remember, in the event that the issuing company of a CDx3 Preferred Stock calls the issue, you will receive $25.00 per share that you own regardless of your purchase price or the then-current market price; $25.00 per share - that s what you would receive. Companies that issue CDx3 Preferred Stocks are not going to continue to pay high dividend rates on CDx3 Preferred Stocks any longer than they absolutely have to. Consequently, one thing that you 2009 by Doug K. Le Du 8
Quick Guide To Using The CDx3 Bargain Table For Subscribers can always say about a period of increasing rates is that they will be followed by a period of decreasing rates. As rates come back down again to, say, 6.75%, what do you think tends to happen to the market price of a CDx3 Preferred Stock like KIM-G that pays 7.75%? If CDx3 Preferred Stocks paying 6.75% are coming out at a market price of $25.00 per share, the market price of KIM- G, paying 7.75%, will tend to be pushed above $25 (since it pays a higher dividend). If you purchased KIM-G for $24.14 (per the above table), you are now in a position to sell it for a nice capital gain not to mention the 8.026% dividend yield you would be earning in the meantime. For CDx3 Investors who are interested in the longer-term capital gain opportunity that a buyer s market can bring, we can add a column to our table that shows the capital gain opportunity in the event that your built-in buyer (the issuing company) calls the issue and buys it back from you for a price of $25.00 on the call date. As you can now see, for CDx3 Investors interested in the highest capital gain opportunities (assuming the issue is called on the call date), PSB-P, in addition to CTZ-A, is suddenly a strong contender. Even though PSB-P s yield is lower than some of the others, its capital gain opportunity is higher. Which one you invest in, if any, gets back to your personal goals, resources and risk tolerance. But I think that you can see how this simple table is able to identify the real bargains for you. Through the last two iterations of this table, we have seen how those who favor dividend income can quickly identify their strongest candidates. Similarly, by adding the last column, CDx3 Investors who favor longer-term capital gain opportunities can see their best choices. 9 2009 by Doug K. Le Du
Doug K. Le Du Author, Preferred Stock Investing But what about CDx3 Investors who want the best of both worlds? By looking at the table, can you spot the top two CDx3 Preferred Stocks that, in the event of a call on their call date, offer the highest overall return? The effective annual rate of return of an investment considers (1) the declared dividend rate, (2) the number of dividend payments that you will receive before the call date and (3) your purchase price. Once calculated for each of our candidates (using Excel s RATE function), the effective annual return will show us the CDx3 Preferred Stocks that will produce the highest overall return on our investment (assuming that the issuing company calls the issue on the call date; if you sell the CDx3 Preferred Stock prior to the call date, presumably for a higher price than $25.00, your effective return will be even higher). The CDx3 Bargain Table The table on the following page is called the CDx3 Bargain Table and is updated and provided to subscribers to the CDx3 Notification Service each month. The CDx3 Bargain Table identifies the CDx3 Preferred Stocks that, during a buyer s market, are most likely to offer strong financial performance for CDx3 Investors who have varying investment objectives (given the assumptions and limitations provided throughout this Quick Guide). In March 2008, the average interest rate being paid by a bank Certificate of Deposit (CD) was 3.621% (24 months, $10k; source: bankrate.com). Now take a look at the last column that we just added on the far right of the CDx3 Bargain Table. This column (Highest Effective Annual Returns) shows you in black and white the strength of the CDx3 Income Engine during a buyer s market. Whether you are looking for high dividend income or a longer-term capital gain opportunity, using the Three Rules of Market Price Predictability from Preferred Stock Investing plus the information presented on the monthly CDx3 Seller s Calendar, the CDx3 Bargain Table identifies the strongest candidates for your consideration. The CDx3 Bargain Table is provided to subscribers of the CDx3 Notification Service with each monthly issue of the subscriber s newsletter CDx3 Research Notes. 2009 by Doug K. Le Du 10
Quick Guide To Using The CDx3 Bargain Table For Subscribers CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Bargain Table, CDx3 Seller s Calendar, CDx3 Key Rate Chart are trademarks of Doug K. Le Du. All rights reserved. 11 2009 by Doug K. Le Du