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Time to Considered Preferred Stocks

Plus Four Worth Checking Out

With the market outlook overheated, this might be a good time to take another look at preferred stocks. Many are paying dividends equating to 5% to 8% annual yields. Here's what you need to know.

Compared to common stocks, properly chosen preferreds are relatively safe. Properly chosen means preferreds issued by firms that won’t run short of cash needed to pay the preferred dividends.

Preferred Stock Quick Check

You can go a long way in that regard by simply checking the issuer’s common stock share price. As a rule of thumb, consider firms with common stocks trading below $10 per share as financially shaky and those trading above $50 per share to be solid players.

The only other risk of owning preferreds is that rising prevailing interest rates reduce the value of existing preferreds’ income stream. However, few expect prevailing rates to rise much, if at all, this year. Here’s more that you need to know.

More You Need to Know

Similar to bonds, companies sell preferreds to raise cash. Although they could be sold at any price, most are issued at $25 per share. The initial yield, called the “coupon rate,” is the annual dividend divided by the issue price. For instance, the coupon rate on shares issued at $25 and paying $1.50 per year would be 6%. Coupon rates in this market typically range from 5 to 8.5%.

Because those rates are relatively high, $25 preferreds issued by firms considered financially solid often trade in the $25 to $27 per share range, and sometimes higher.

While the coupon rate is based on a preferred’s issue price, the market rate is the dividend yield based on the current trading price. So, if a 6% preferred trades up to $26, the market yield to new buyers drops to 5.8%. Now here’s the tricky part.

Calling Preferreds

Most preferreds are “callable,” meaning that the issuer has the right to call (redeem) them at the “call price” after a specified date (call date). The call price is the original issue price, and the call date is typically five years after the issue date. The issuer is not obligated to redeem the shares at the call date and many preferreds continue to trade long after the call date.

You’ll do best by 1) sticking with preferreds with call dates at least three years out, 2) pay no more than $2 over the call price, and 3) if they’re trading over the call price, sell them around 12-months before the call date. 

Four Preferreds Worth Checking Out

Here are four preferreds that look like good buys to me. All have $25.00 issue and call prices.

Annaly Capital Series G, 6.5% coupon (NLY-PG). Recent price $24.00, market yield 6.8%. Mortgage REIT.  

Ashford Hospitality A, 7.3.75 % (AHT-PG). Recent $23.08, market 8.0%, 10//21 call date. Hotel REIT.

Carlyle Group, 5.875% (TCGP). Recent $23.13, market 6.3%, 9/221 call date. Private equity investor.

eBay, 6.0% (EBAYL). Recent $26.13, market 5.7%, 3//21 call date. Online marketplace.  Preferreds ticker symbols are not standardized.

The symbols I’ve listed can be used on Yahoo! (finance.yahooo.com). When you’re ready to buy, use your broker’s symbol lookup function.  

For more on evaluating preferreds, download my free Preferred Stocks Primer.  

published 4/16/19

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