I am retired and take educated guesses on all things financial.

January 04, 2008

January 5, 2008: A Preferred Idea

As one investment theme after another appears to blow up, and with angst a dominant emotion across a wide swath of the investment spectrum, now may be the time to take a look at extracting income from a portion of your diversified portfolio. I try to select income-laden securities that are relatively safe, yet possess grounds for appreciation (not alone here, I'm sure). Thus, I think that a good choice for this approach may be the PowerShares Financial Preferred Portfolio (PGF).

The financials and their minions are in the tank, and the common stock of most have been drawn and quartered. However, preferred stock of these institutions offer an attractive yield now, with the almost certain prospect of a nice gain in share price as the financial quagmire corrects itself.

The Financial Preferred Portfolio holds twenty-eight securities. Since the fund's inception in December of 2006, returns have been in the red, which should be expected. The top ten holdings as of January 3, 2008 are Aegon 6.375% Perpetual Preferred, Royal Bank of Scotland Preferred series N,M and S, ING Perpetual Hybrid 6.375%, HSBC Holdings A 1/40PF A,Goldman Sachs Preferred 1/1000 B, Barclays Bank Preferred 2, Metlife Preferred B 6.50% and Bank of America 1/1000 D 6.204%. The ten securities comprise approximately 46% of the portfolio. The remainder of the portfolio looks to be a roster of traditionally sound and shareholder friendly financial institutions that should appreciate nicely as their business practices are remediated.

As of this writing, 77% of the portfolio is in preferred stock. 19% is in foreign preferred stocks (or their equivalent) and approximately 4% is in foreign bonds. This gives the investor some currency and geographical diversification as well.Security ratings are approximately 75% in the excellent rated categories and 25%in the moderately speculative categories. Monthly dividends for PGF average about 12 cents per share, currently trading at about $21.00. Expenses of the fund are at .60%.

Disclosure. I own PGF as a recent addition to my Speculative Portfolio. It is my opinion that these shares might be best held in a tax-advantaged account.

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