Preferred stock

Preferred stock, a.k.a. preferred share, preference stock, preference share.

Definition: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

extracted from: http://www.investopedia.com/terms/p/preferredstock.asp#ixzz1X5HuqypM

In general, preferred shares are a form of corporate debt that has some qualities of common shares as well as that of bonds. The main characteristic of preferred shares are that they pay a fixed return to the holder at regular specified intervals, usually in the form of a dividend. The dividend payment typically does not fluctuate or change over time as it is determined at the time of issue, unlike common shares. However, there are rate resetting preferred shares as well (where the payment is calculated based on a predetermined formula).  The preferred share represents partial ownership in the company just like common shares do. Often, they are redeemable by the corporation after a specified date.

Here's how you read a preferred stock listed on the SGX:

eg. DBS Bk 4.7% NCPS 100

• DBS Bk - The company that offers the stock, in this case, DBS Bank.
• 4.7% - The dividend payout as a percentage of the initial offer price PER ANNUM, in this case, 4.7% of $100 = $4.7 p.a.
• NCPS - Stock type. NCPS means non-cunmulative preferred stock. If they did not declare a dividend last year, you cannot receive what they owe you last year.
• 100 - Quantity per lot (no number = default lot size of 1,000 shares), in this case, 1 lot = 100 shares.

Preferred stock is the preferred choice for growing money compared to fixed deposits as they tend to have a higher return of investment. Why?

The following are the links to the deposit rates of the various banks:

DBS - http://www.dbs.com/ratesonline/Pages/fdsgd.aspx

OCBC - http://www.ocbc.com.sg/personal-banking/tools%20and%20info/Toi_Rates_Dep_Listing.shtm

UOB - http://www.uob.com.sg/personal/deposits/fixed/singapore_fixed_deposit.html

Citibank - https://www.citibank.com.sg/gcb/static/deposit_boardrates.htm?eOfferCode=SGTDULW

Among these banks, OCBC and UOB both give the highest return of 0.7% p.a. for a deposit of >$500,000, for at least 2 years. UOB offers a promotional 0.938% p.a. for a deposit of >$40,000 for at least 3 years at time of posting. Hence the returns of fixed deposit from OCBC and UOB are 14.97% and 27.80% for 20 years respectively. Lets compare these to their respective prefered stock...

OCBC Bk 5.1%NCPS 100

Last traded price: $106.00 (5 Sep 2011)

Dividend yield: $5.1/share p.a.

Real Return: $5.1/$106 = 4.811% p.a

Minimum "deposit": $106 x 100 shares = $10,600
Total Yield in 20 Years: 4.811% x 20 = 96.22%

UOB 5.05%NCPS 100

Last traded price: $105.00 (5 Sep 2011)

Dividend yield: $5.05/share p.a.

Real Return: $5.05/$105 = 4.810% p.a

Minimum "deposit": $105 x 100 shares = $10,500

Total Yield in 20 Years: 4.810% x 20 = 96.20%

As you can see, preferred stock far outpace fixed deposit in terms of returns.
Of course the risk is that the banks may choose not to pay dividends for the year. Historically though, all 3 banks have been declaring regular payouts even during the great recession of 2008-2009.

6 keys to finding companies with economic moat

1. Solid Identity
When investing in the stock market, identify companies with a solid identity. Differentiation of the company from the rest of the players in the marketplace is one way to spot a company with a solid economic moat. When stock-picking companies, identify companies with a distinctive and outstanding look, brand name or brand symbol because these products ensure the companies’ profitability, which makes your investment profitable as well. Examples of strong global brands who were able to give a strong brand identity are Coca-cola, McDonald’s, Mercedez Benz, Apple, and Google.

2. Exclusive Rights
Investing in a company with exclusive product right is always a good idea. A patent or copyright grants a company exclusive rights to manufacture and market products, which translates to a monopoly of the market for the duration of its patent or copyright, which is a considerable amount of time. This is indicative of a considerable economic moat, which makes it a good choice for investing because it ensures a profitable investment. When stock-picking companies, bear in mind that multinational pharmaceutical companies would have products with exclusive rights.

3. Looking to the future
A company with explicit long term strategy is a company that visualizes its growth and the strategies necessary to achieve it. It also plans for unforeseen circumstances that can hamper the company’s growth. When stock picking and making decisions on investing in a company, the company’s future directions accounts for additional economic moat.

4. Deterring customer switching
With the many choices available in the market today, switching products and services has become a common practice among customers. When the cost for switching is negligible, customers are more open to vary their product consumption. This is one thing to look into when stock-picking and investing. Companies and products with a higher cost for switching will have stronger economic moat. When switching is hampered by a high cost, product loyalty is assured, and high stock performance can be expected. Mac products for one, creates this scenario. Since you have to invest on software, which is exclusive for Mac products, the urge to switch is significantly curbed.

5. Big Capital
Products needing a high capital to develop, maintain, and improve also strengthens its economic moat. Companies with a high capital requirement guarantees limited competitors. When there are limited competitors, the customers will also have limited choices from where to source their products. Example of which are cable and telecommunications companies.

6. Low capital
On the other end of the spectrum, low cost of production produces products, which can be passed on the consumers at a lower and more competitive price, opening itself up to a broader consumer population. This increases the product’s economic moat and should be considered when stock-picking. Before investing though, you also need to analyze how varied the market is. In a varied market, a lower prize can also predispose frequent switching from customers.