Preferred Stocks?

Question

How do you figure out downside protection for preferred stocks.

Answer 1

Downside protection? That is what options are for, to presell, if you do it right, at a profit ("in the money"). It is more involved than that, but part of the reason some preferreds have such luscious yields is that the price is dropping to compensate for (1) higher risk if the company is in trouble or a problematic industry, or (2) interest rates have risen (so the price has to fall in order to get an inviting yield).

Preferreds are really for the long term, especially if they are convertible to common shares and the company's future prospects are looking really, really rosey. Otherwise, like bonds, they will fall or float with interest rates fluctuations.

Watch out for royalty trusts, they will diminish simply because the mineral depletions from mining or drilling production leave less in the ground for there to be royalties on.

Answer 2

I'm not sure that I understand the question.  Preferreds are sold for the yield and so should be treated a lot like bonds, unless they are convertible and the conversion is a real possibility in the near future, then they  behave like the underlying stock.

Answer 3

Credit risk which would impair the dividend and the stock price.  Preferreds are rated much like bonds.  They have a letter rating associated with them.