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Utility Preferreds: Safe High Dividends
While you’re lucky to get 2% interest from a
bank CD, many preferred shares issued by utility companies are paying
6% to 7% dividend
yields.
Utilities, banks, insurance companies and others sell preferreds to
raise cash. Usually, preferred share prices don’t move much. Most are
issued at $25 and prices typically range between $24 and $26. However,
due to the recent economic turmoil, many preferreds are trading below
that range, creating capital appreciation opportunities.
I’ve explained how to find those opportunities in earlier columns.
Today, I’ll focus on finding preferreds issued by utilities paying
dividends equating to 6% to 7% yields. I
picked utilities because regardless of what happens to the economy, most
will chug along and meet their debt obligations.
Here are some things you need to know about preferreds.
About Preferreds
Most preferreds are “callable” meaning that the issuer has the right to
call (redeem) them at the “call price,” which is usually the original
issue price. The shares can be called at any time after the “call date.”
You would enjoy $1 per share capital appreciation if you bought shares
at $24 that were called at $25. Conversely, you’d lose $1 per share if
you paid $26 for the same shares. Thus, if you pay more than the call
price, confirm that call date is far enough into the future that the
cumulative dividends that you receive more than make up for the
potential capital loss. Your yield is the next 12-month’s dividends
divided by the price you pay for the shares.
Finding Preferreds
Use Quantum Online (www.quantumonline.com)
to find and research preferreds. You can use Quantum’s screener to find
candidates. Click Income Tables and then select Income Securities
Screening Form to access the screener.
Leave everything that you’re not interested in on the form blank. I
selected Utilities for Company Type and “Baa2” for minimum Moody’s
Credit Rating. Moody’s rates preferreds using a complicated series of
letters and numbers. Fortunately, Quantum lists the possible ratings on
its screening form. The Baa2 rating is Moody’s second lowest “investment
grade” rating.
Quantum listed 160 preferreds meeting those requirements. The list isn’t
as daunting as that number indicates because many are similar preferreds
issued by the same utility. In addition to Moody’s, the screener also
lists the Standard & Poor’s credit ratings. Avoid preferreds with
ratings shown in red (non-investment grade). Click on the preferred
ticker symbols to see Quantum’s description. Click on any term with a
link to see Quantum’s definition of that term.
Besides for Quantum’s information, you’ll also need the current trading
price, the dividend yield based on the current price, and the average
trading volume. You can get them on TDAmeritrade (www.tdameritrade.com).
You don’t have to be a TDAmeritrade customer. Simply enter the preferred
ticker symbol in the Quotes box. Rule out preferreds with average
trading volumes less than 5,000 shares.
Here’s a sampling of preferreds that I found interesting.
• Alabama Power 5.20% Class A (ticker
ALP-N), current yield 6.2%
• Entergy Mississippi 6% Series First
Mortgage (EMQ), 6.2%
• FPL Group Capital 6.60% Series A (FGC),
6.6%
• PPL Energy Supply 7.0% Senior Notes (PLS),
7.0%
Unlike common stocks, preferred ticker symbols are not standardized.
Your broker may use a different symbol. Use your broker’s symbol lookup
function and enter the issuing company name to see a list of all
preferreds issued by that company.
Research the issuing company to learn if there are any problems that
might cause it to suspend its preferred payouts. The more you know about
the issuer’s outlook, the better your results.
published 6/21/09 |
