Wednesday, March 08, 2006

My Counter Interest/Dividend Strategy

First of all, I love the idea of applying Reverse-Dutch Auctions to the loan process. I applaud Prosper and may, in the near future, allocate up to $2000 towards some investments. I want to give it some time though to learn from the successes and failures of others using Prosper. I do have some strategies that I will post in the near future that may help you with diversifying your Prosper loans. I will also form and post the name of my counter-intuitive Prosper group name.

Right now, I'm specifically interested in buying preferred stock in companies. I ran a search this morning and found 70 companies with dividend rates above 8%. I have not yet found a companion website that does yield-to-maturity calculations though. I'm going to hold off buying any of these preferred stocks until I can blog on here an easy-to-use site for determining yields-to-maturity. If not, I’ll probably show the required calculation and give a tutorial. Of the list of 70 preferred stocks, there were a few that caught my eye. I feel that buying a few preferred stocks could diversify your investments and hedge your risks against default on any Prosper loans.

I do have one problem with Prosper right now. It appears from the reporting of other blogs that there is an excessive period where PROSPER is collecting interest on your money without sharing this interest (let me know if I’m wrong). This idea is inherently flawed in that it increases the likelihood of lenders increasing their risk tolerance and lending to higher risk candidates just to get their net preferred yield on loans.

Here’s Wikipedia’s definition of yield-to-maturity. They define YTM for only bonds; however, I believe that an equivalent calculation could be done for preferred stocks. If not exact, a close enough SWAG. R/ FJ


Jose Anes said...

I also like dividend paying stocks
Money And Investing

Finance Junkie said...

I'm having difficulty getting a preferred security that has an effective yield above 7.5%.

Even though 70 preferred securities had coupons over 8%, many were bid up so that the share price is at a premium, essentially reducing the effective yield.

Contemplating whether it's worth going for a 7 - 7.5% preferred security (more plausible), or just waiting for a good rate on a CD.

Will revisit this specific posting in future.

Anonymous said...

Hi FJ,

I'm the product manager at Prosper, and you stated "It appears ... that ... PROSPER is collecting interest on your money without sharing this interest (let me know if I'm wrong)." You're wrong: Because of rules associated with pooled accounts (such as the ones that we use to hold lender money), Prosper is not allowed to earn interest on those accounts. We are actively pursuing ways to offer interest on lender deposits, but at this time, we do not offer it. I look forward to hearing about your experience lending on Prosper!

Best regards,