Given
this turbulent market, this would be a good time to consider
preferred stocks.
Yes, they’ll drop when the market plunges, but not as
much as common stocks. And, when the market stabilizes, properly
chosen preferreds will move back up to their normal trading ranges.
Meanwhile, you’ll be collecting dividends equating to 4% to 7%
annual yields.
By properly chosen, I mean preferreds issued by
corporations that won’t run out of cash to pay the specified
dividends. The four preferreds that I’m going to describe below meet
my “properly chosen” criterion. In a future column, I’ll describe
how you could do that analysis.
About
Preferreds
Corporations issue preferreds to raise cash. Although
they can be sold at any price, most are issued at $25 per share and
pay dividends equating to 3% to 7% annual yields.
Preferred share prices vary with supply and demand
and in normal markets; typically move up to the $27 to $28 per share
trading range.
Most preferreds can be called (redeemed) five years
later at the issue price. However, the issuer doesn’t have to call
the preferreds at the call date. In fact, many preferreds are not
called for years after the call date. The decision about when to
call preferreds typically hinges on whether a corporation can
replace them with new preferreds paying lower interest rates.
The dividends issued by regular corporations are
considered qualified dividends and are subject to the maximum 15%/
20% dividend tax rate. Preferreds issued by tax-exempt firms such
as real estate investment trusts are taxed as ordinary income.
Unlike common stocks, preferred stock ticker symbols
are not standardized and vary from broker to broker. Enter the
issuer’s company name and use your broker’s ticker lookup function
to find the correct ticker.
Preferred Terminology
Market yield is the
return based on the current trading price. For instance, the market
yield for a preferred trading at $26 per share and paying $2.00 per
share annually would be 7.7%.
Yield-to-call is the
average annual return you would earn if your preferreds were called
at their call price on their call date. In practice that’s a worst
case scenario because preferreds aren’t usually called that soon.
Here are four preferreds that meet my selection
criteria. All were issued at $25 per share.
Compass Diversified Holdings 7.875% Series B
(ticker CODI-B): Compass (CODI) is a private equity firm that holds
a variety of mid-sized industrial and consumer product companies,
all based in North America. Based on its recent $26.20 per share
trading price, its market yield is 7.5%. Yield to call based on its
April 30, 2028 call date is 7.8%. Its dividends are taxed as
ordinary income.
Bank of America 4.750% Series SS (BAC-S):
Bank of America (BAC),, with 4,200 offices, is one of the world’s
largest financial institutions. These preferreds, rated investment
quality (BBB-) by Standard & Poors, recently traded below their $25
call price at $24.66 per share. Thus their market yield, at 4.8%, is
slightly higher than the 4.75% coupon rate. Based on their 2/17/27
call date, yield to call is 5.1%. Its dividends are taxed at
qualified rates.
Apollo Global Management 6.35% Series A
(ATH-A). Apollo (APO), formerly Athene Holding, is an alternative
asset manager. It raises capital for, invests in, and manages
alternative investment vehicles, including private equity and credit
activities. These preferreds, rated investment quality (BBB-) by
S&P, recently traded at $26.96 per share. The market yield in 5.9%
and the yield to their 6/30/29 call date is 5.1%. Dividends are
taxed at qualified rates.
U.S. Bancorp 4.50% Series O
(USB-S): U.S. Bancorp (USB), the 6th largest U.S. bank by deposits,
USB offers traditional banking, wealth management, securities,
insurance, and payment services. Its preferreds rated investment
quality (BBB+) by S&P, recently traded below their call price at
$23.29 per share. The market yield is 4.8% and the yield to its
4/15/27 call date 6.1%. Dividends are taxed at qualified rates.
As always, do your due diligence, the more you know
about your stocks, the better your results.
published
3/16/22