Given market volatility, this is a good time to
consider preferred stocks.
Even after last Wednesday’s massive 800 point Dow
Jones drop, preferred stocks, at least as gauged by the iShares
Preferred and Income Securities ETF, was still even for the month
(August) versus the Dow’s 5% loss. Further, year-to-date, the
preferreds’ ETF had returned 12% compared to 9% for the Dow.
What’s Up With Preferreds?
Many are paying 5% to 8% dividend yields (annual
dividend divided by share price). Compare that to what you’re
collecting from your money market fund these days.
What You Need to Know
Unlike common stocks, you buy preferreds for the
income, not share price appreciation.
Although traded like common stocks, preferreds
represent debt, not ownership. Unlike bonds, the issuer may suspend
paying its preferred dividends without filing for bankruptcy. Thus,
avoiding that problem is priority number one for preferred buyers.
Most firms issue (IPO) preferreds at $25 per share,
although issue prices can vary. At IPO time, the issuer specifies
the dividends that it will pay, typically quarterly. The initial
dividend rate (coupon rate) mostly ranges between 4% and 8%.
Since they trade on the open market, share prices
vary with supply and demand. These days, most $25 preferreds
eventually move up to the $27 to $28 per share trading range.
Quantum Online (www.quantumonline.com),
offers a free screener and is a good resource for finding and
As a preferred holder, your worst nightmare is that
the issuer runs short of cash to pay the specified dividends. For
“cumulative” preferreds, the issuer remains on the hook for missed
payouts, but can wait up to five years to pay them. So, in practice
it’s best to stick with preferreds issued by firms that won’t run
into cash flow problems.
As a rule of thumb, you can avoid most problems by
checking the issuers’ common stock share price. Those with common
trading below $10 are probably risky bets while those with common
shares trading above $25 are likely solid players.
Here’s the Catch
Most preferreds can be called (redeemed) at a
specified call price, typically the issue price, at a specified call
date, typically five years after being issued. But the issuer
doesn’t have to call the preferreds then. They could call them
anytime after the call date, or perhaps, never. If you’re holding a
$25 preferred trading at $27, you’d lose $2 per share if you’re
holding them when called. Avoid that problem by selling a year or so
before the call date.
Here are four preferreds interesting preferreds.
All were issued at $25 per share.
• Brunswick 6.625 percent
Senior Unsecured Notes (ticker BC-B): Recent price $26.99. Market
yield: 6.1 percent. Call date 1/15/2024.
• Cherry Hill Mortgage 8.2
percent Cumulative (CHMI-A): Recent price 25.45. Market yield 8.1
percent. Call date 8/1/2022.
• Chimera 8.00 percent
(BBT-B): Recent price $26.59. Market yield 7.6 percent. Call date
• Spark Energy 8.75 percent
Cumulative (SPKEP): Recent price $24.54. Market Yield 8.9 percent.
Call date 4/15/2022.
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.
As always, do your due diligence, the more you know
about your stocks, the better your results.
For more on evaluating
preferreds, download my free