How to Buy Preferred Shares of General Motors or Ford?

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In the last few days, I’ve gotten several emails that reminds me of the one (and only) time I sat in on a high stakes poker game.

I say this facetiously of course, but I have received numerous requests from friends and readers who are repeatedly asking the same investing / trading question.

It’s one that I’m reluctant to mention since it deals specifically with two very risky companies, but what the heck, you only live once.

Matt – Should I buy stock in GM or Ford at these low levels?

Of course, my first reply is: Are you [expletive omitted] crazy?

If that scare tactic didn’t work, I tried to come up with a legitimate argument to talk them out of making such ultra-risky investments.

The two occasions I have gone along with this idea was one person whom I knew to be an experienced trader who uses stop loss orders and the second is a daytrader who sat in front of his computer every second that he held General Motors (NYSE: GM) or Ford Motors (NYSE: F) common stock.

Best Way to Trade the Big Three Bailout

Being one to give credit where credit is due, I saw a semi-suitable answer to this question watching Jim Cramer’s Mad Money tonight where he discussed his preferred method of trading the Big Three Automaker bailout. I must admit — I’m not 100% completely sold on the idea.

According to Cramer, the best possible way to own stock in GM or Ford is by owning the preferred shares:

General Motor’s 6.25% coupon 2033 convertible (NYSE: GPM). This GM preferred stock currently has an annual dividend yield ~ 34% while trading in the low $4 range.
Ford Capital Trust II (ticker symbols: Yahoo Finance F-PS or Google Finance F-S). This Ford preferred stock currently has an annual dividend ~ 35% while trading in the low $9 range.

The big argument here is the typical dividend investor mantra of “getting paid to wait“. Dividends are certainly welcome in this environment, especially high yielding ones like we have here, but the problem I’ve seen time and time again in this environment is the devaluation of the principle investment.

In other words, the amount of money it takes to buy X amount of shares can be significantly reduced due to market volatility and panic selling.

For example, if GPM falls from $4 to $2, you lost 50% of your principle investment. However, you would still receive a 34% dividend payment if you held onto the stock until all dividend payments have been paid out (GPM pays semi-annually).

Obviously, the risk here is substantial considering the unknown outcome of the current Congressional hearings, and the long term future of General Motors, Ford, and Chrysler. It’s almost a certainty that the Big Three will be back asking for additional funding, so if they do get their “bridge loan“, it’s likely that they will receive additional taxpayer funding as well.

Disclosure: I hold no shares, common or preferred, in General Motors or Ford at the time this article was written and published.

Photo by waffler

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