Wells Fargo 8.00% Preferred Stock Series J

Wells Fargo & Co., 8.00% Dep Shares Non-cumul Perp Cl A Preferred Stock Series J

How is works:
Yesterday I bought WFC-J which is a preferred stock carrying an 8% coupon rate. The stock was issued at $25 a share, and has a call price of $25 per share on the call date of 12/15/2017. I paid $27.10 a share, this means I paid a premium and will not earn the full 8% coupon rate.

Here is what I will earn and lose:
I paid $27.10 for the shares which carry the 8.0% coupon rate. That rate is calculated based on the initial share price, $25 in this case. The annual amount of the payment (spit up quarterly) is $2.00 per year, thus 8% of the $25 issue price. Given that I paid $27.10 for the shares my payment is actually 7.38% per year. I will lose 8.4% on the stock on 15-Dec-2017, assuming that Wells Fargo will buy it back on the call date. This means I will collect $12 per share over the next 6 years, which represents a 44.28% gain. Of that I will ‘give back’ $2.10 a share leaving me with $9.90 of actual gain which translates to a 39.6% gain over the 6yr period.

The downside of this trade is that it is highly unlikely that I can make anything more than 39.6%, and there is always the small risk that the company could go out of business or be unfit to pay the dividend. In this case I do not see Wells Fargo having a high risk for either, and clearly the $2.10 premium means the market agrees. The question is will the common shares of Wells Fargo be up more than 39.6% in 6-years? And that does not factor that I’ll collect $0.50 a share each quarter for the next 24 quarters. Clearly that is money I can use for other investments.