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Find it a la shma What is adjustable rate preferred

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stock Okay let's start with the basics preferred stock and

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yes we have a whole video on this one as

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well Preferred stock generally pays a dividend and is often

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convertible into common stock at a premium to where it

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was issued So preferred stock is kind of bond like

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and kind of equity Like fish Most preferred stocks get

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issued some set dividend like a base rate of say

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six percent or something like that And note that it's

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called a dividend in the case of preferred stock not

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an interest payment subtle but very important difference here because

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interest on bonds is tax as ordinary income and dividends

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on equities are qualified meaning that their tax at long

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term gains rates or dividend tax rates anyway these preferred

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pay six percent no matter what the price at which

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one preferred unit trades will fluctuate like a stock or

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bond But that thousand dollars par preferred will just continue

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to pay its sixty bucks a year in dividends until

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the preferred shares are bought back by the company you

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know at some premium or until the shares convert into

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being common stock or the company goes bankrupt in armageddon

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scenario one starring ben affleck jr But in the case

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of adjustable rate preferreds it's not always the six percent

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that gets paid or whatever the initially stated rate wass

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in the case of these equities and yes preferred stocks

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considered equity even though it acts like a bond Sometimes

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in this case the dividends will very with some set

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indexed like t bills or live or where the preferred

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dividend might be set on a say a trailing four

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quarter bases to be two hundred basis points Mohr interest

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that it pays than the average t bill reign as

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of blah blah blah blah time frame Well why would

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you want this adjustable feature with preferreds Well you can

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imagine a scenario in a low interest rate environment where

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we have preferred stocks paying five percent and the prevailing

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rates are three percent for very high quality dead teo

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top notch blue chip companies But then we get inflation

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and that three percent for the best borrowers goes to

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six percent and a given preferred stock would then need

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to pay more like eight percent to be trading around

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The thousand dollars par value it was issued at So

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said another way if that piece of paper is on

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ly giving investors fifty bucks a year when a very

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similar piece of paper gives investors eighty bucks a year

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investors will want charity They will sell down than thousand

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dollar piece of paper giving only fifty bucks to price

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low And so that when it's bought it pays eighty

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bucks a year in charity right that thousand dollars going

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to sell down to nine hundred eight hundred seven hundred

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until whatever you pay for it pay the same interest

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rate is that eighty dollars year thing Thank you Inflation

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specifically In this case a thousand dollars preferred paying fifty

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bucks a year would have to sell for six hundred

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twenty five bucks teo yield eight percent meaning that the

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thousand dollars par value that investors bought in a five

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to ten years ago would drop dramatically by three hundred

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seventy five dollars a unit to be six hundred twenty

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five dollars To be quote at market unquote and that's

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a problem a big risk that investors will hate Hence

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the invention of the adjustable feature here Adjustable rate preferred

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Stock Great inventions So in this case if it preferred

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was adjustable if rates went up a cz were describing

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here then it is extremely likely that the t bill

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or live or rates would go up similarly as they

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generally follow inflation grids over time And in this scenario

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if the rate of the dividend on the preferred stock

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at just's then it's always going to be something like

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t bill ray plus three hundred basis points or something

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like that so that if there really is big inflation

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and federal funds rates go from three percent to six

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percent The return on these preferreds would go up about

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the same amount making the security much more appealing to

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investors Got all that well let's Just hope that if

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anything else is in need of getting adjusted those investors

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will take care of it in private nia do that

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