Harry Domash's Winning Investing



Preferred Stocks =  Steady Income

 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

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