How badly do you get clobbered when you sell preferred stocks and/or bonds on the secondary market?

I have come to realize that a bond with these features can bring the Safe Withdrawal Rate to 6% (plus inflation) when part of a delayed purchase approach:

Maturity: 10 years from today (plus and minus 2 years would be OK)

Interest Rate: 6.5% or higher

Full principal payment at maturity (in nominal dollars)

Investment Grade security

I do not see a satisfactory selection at QuantumOnline.com when I demand payment by 1/1/2020. I see lots of attractive opportunities when there is no time restriction. The big issue is how badly seller will get clobbered in the secondary market assuming that interest rates rise.

Have fun.

John Walter Russell

If I understand your question, the bond’s duration will give you an approximation.

From Wikipedia:

“Duration is useful as a measure of the sensitivity of a bond's price to interest rate movements. It is approximately proportional to the percentage change in price for a given change in yield. For example, for small interest-rate changes, the duration is the approximate percentage that the value of the bond will lose for a 1% increase in interest rates. So a 15-year bond with a duration of 7 would fall approximately 7% in value if the interest rate increased by (1 %)”.

From the Yahoo Bond Screener there is a Tennesse Gas Pipline bond with a 7.5% coupon maturing 01-Apr-17.  It is rated BBB by Fitch and its price is 110.  The YTM is 6.102% and the current yield is 6.818%.  My calculation gives a duration of 6.6 years.  Therefore, if interest rates rose 1%, you could lose approximately 6.6% if the bond were sold before it matures.

Selling at 110, this is a premium bond and will have a different duration than a discount bond with the same YTM.

Regards,

Lew

Thanks, Lew. This is very good news. A rise of 1% or 2% would be OK.

And this is a bond, not a preferred stock. That makes it even better.

Have fun.

John Walter Russell
 

JWR... Bonds like the one above are good choices..

Personally, I prefer equities like TPP, BPL (MLP pipelines) and O, DDR, DRE (REITs) better options than preferreds in the 6-7% yield category.  If I was going to buy a preferred I would be looking at 10% yields... check out some of the better rated REITs and you can get those kinds of yields.... preferreds come with equity risk too... which is why I would look for higher yields.

Stats

Thanks, Stats.

My reason for bonds and preferred stocks is to sell about 10 years from now, assuming a big decline in market prices (and a corresponding rise in dividend yields) by that time. If I can find something that generates decent income without too bad a beating when sold, a 6% (plus inflation) continuing withdrawal rate is within our grasp.

This is much, much better than the traditional claim of 4% (plus inflation) for 30 years. 

Your Master Limited Partnership pipelines and your REITS have a good chance of doing the retirement income job on their own. 

Your remark about quality preferred stocks is highly encouraging. I believe that we will be able to diversify risks adequately.

[This is out of my territory. Most of my investments have been stocks.] 

Have fun.

John Walter Russell 

I do hold 4 individual bonds, but I boght them to hold for the interest income they produce, and I have no intention of ever selling them, due to the limitations you've mentioned. Instead, I'll simply receive back my initial investment when they mature in several years.

Other than exchange traded bonds with their own trading symbol, there is no bond market for the individual investor. When you buy or sell a non-muni, non-government bond, you are buying from or selling into a brokerage's bond inventory. Due to the mark-up expected by the brokerage (plus trading costs) and the illiquidity of the bond, you should expect the transaction costs to represent a sizable % of the trade value relative to a similar stock trade. Depending on the dollar amount and the bond, I've seen this calculated as low as 2-3% up to 8-10% of the value of the trade. Another way to think of individual bond trading is like a used car auto lot. Yes, you can sell your car to the car lot owner or you can buy your used car from him, but in either case you'll be paying a considerable discount or premium to the car's fair market value, as this is how the lot owner makes money.

Preferreds are a bit different, as these do have a market, although usually a thinly traded one. But preferreds have a couple of problems bonds do not. The issuer can elect to suspend payments without declaring bankrupcy, the preferred shares may be treated horribly in a hostile takeover of the company and, other than default risk, probably the biggest risk to preferred shareholders is that the preferred may become perpetual and never be redeemed by the issuer if interest rates don't drop below the issue 'coupon' rate. And I would never buy or sell a preferred stock using a market order...you've got to use limit orders, as otherwise the bid-ask spread could get to be very wide.

BruceM

That is valuable information.

Thanks especially for the information on preferred shares: the coupon issue and using limit orders.

I am not overly concerned about suspended dividends IF I buy from a company noted for its dividends on common stock. I would be cautious, otherwise.

Have fun.

John Walter Russell
 

orygunduck:

And I would never buy or sell a preferred stock using a market order...you've got to use limit orders, as otherwise the bid-ask spread could get to be very wide.

Good observation. I've wondered about trying to set aggressive buy/sell prices with limit orders on preferred stocks. Since most are thinly traded, one might occasionally get a really good price from someone who really wants in/out (or from someone who just uses a market order).

I see some evidence of this happening, very occasionally, using Yahoo's "historical prices", assuming they are accurate.

Duane