With the market outlook
might be a good time to take another look at preferred stocks.
are paying dividends equating to 5% to 8% annual yields.
Here's what you need to know.
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.
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
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.
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
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%.
Ashford Hospitality A,
7.3.75 % (AHT-PG). Recent $23.08, market 8.0%, 10//21 call date.
Carlyle Group, 5.875%
(TCGP). Recent $23.13, market 6.3%, 9/221 call date. Private equity
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