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Time to Considered Preferred Stocks

Plus Four Worth Checking Out

Given market volatility, this is a good time to consider preferred stocks.

Why Now?

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.

Finding Preferreds

Quantum Online (www.quantumonline.com), offers a free screener and is a good resource for finding and researching preferreds.

Evaluating Preferreds

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 3/20/2024.

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 Preferred Stocks Primer.  

published 8/19/19

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