What am I missing here?

Question

Is it just me, or is this just about the perfect time to invest in preferred stock of financial companies?

I've been looking at the Lehman Brothers Class L Preferred (LEH-PL in Y! Finance). Right now, it's offering more than a 10% yield, and is trading at a huge discount to par.

I figure that while the banks work out their solvency problems (which is only a minor concern to me, considering that the preferreds are still investment-grade), I can sit around and get 10%. Plus, when they do get back on their feet - if they get back to where they were before the sub-prime mess, which should happen in ~3 years, tops - I'd get ~50% in capital gains on top of that! So for 3 years, I'd have had about a 25% annual gain on average!

...all of which seems WAY too good to be true.

So what am I missing here? If I stay away from non-cumulative preferreds, I should be fine. If the bank gets bought out, I either get called, or keep raking in dividends while I wait out the market.

What am I missing?

Answer 1

I have found that when a company is in trouble they will offer an unusually high percentage rate to get people to invest.

If I were interested, I would do a lot more investigating before I bought a preferred stock paying this dividend.

I do not invest in preferred stock.  Rather than receive a dividend, I like for my investments to grow.

The people that I know that have invested in preferred stock have gotten burned, I just don't trust them.

Answer 2

Your not missing much. Look at Citi a year ago they were at 55 now I'm waiting for them to hit 16. Financial's are almost at the bottom. But why preferred? It's the common stock that will have the better return. Take a look at XLF and the list of financial's in it. Three in that bunch may still go under and three will be bought out. If I bought 100shares of  Citi at 16 and it went back to 32...nice gain...ooooo... what if I did Options or Leaps...mmmmm

Answer 3

Risk.  Its about the same thing as buying a high yield junk bond.  A higher risk of suspending the dividend.  i would check the rating on it.