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Time to Considered Preferred Stocks

Plus Five Worth Checking Out

With the market outlook iffy, this might be a good time to take another look at preferred stocks. Here’s why.

Preferreds are usually less volatile than regular (common) stocks, plus they pay you to own them. In fact, many are currently paying dividends equating to 4.5% to 8.5% yields. Compare that to the interest that you’re collecting on your money market or savings accounts these days. However, your capital is not insured by the U.S. government as it is with savings account. With that in mind, here’s the scoop on preferreds.

About Preferreds
Preferreds trade the same as regular common stocks, but unlike common stocks that represent ownership (equity), preferreds represent debt. Companies sell them to raise cash, much the same as when they sell bonds. Investors buy preferreds for the steady income, usually not for capital gains.

Unlike bonds, a firm may suspend payment of its preferred dividends without filing for bankruptcy. Thus, priority number one is to stick with preferreds issued by firms that aren’t going to run short of the cash needed to pay the required dividends.

Although they could sell them at any price, issuers typically sell preferreds at $25 per share, and specify a dividend (coupon) rate ranging from around 4%t to 9% based on the issuers perceived financial strength. After the IPO, the preferreds trade a prices determined by supply and demand. Currently, most that were issued at $25 per share are trading in the $25 to $27 range. However, those issued by firms with perceived weaker balance sheets typically are trading below $24, some as low as $18 per share.

The market rate is the dividend yield based on the current trading price. For instance, 7.0% coupon rate preferreds issued at $25 per share but trading at $27 would only be yielding 6.5%t to buyers paying $27. 

About Call Dates
Most issuers specify a “call date” at the IPO. If so, the issuer has the right to call (redeem) the shares at the call price, which is usually the same as the issue price. The call date is typically five years after the IPO. Keep in mind that you’ll lose the amount you paid over $25 when your preferreds are called. Issuers could call the preferreds any time after the call date, but in practice, most issuers don’t call their preferreds until some time after the call date. As a rule of thumb, you’ll come out okay if you only consider preferreds with call dates at least three years out and pay no more than $2 over the call price.

Five Preferreds Worth Considering
Here are five preferreds that look like good buys to me. All have $25.00 issue and call prices.

•  AmTrust Series D, 7.5% coupon rate (AFSI-D). Recent price $25.41, market yield 7.4%, 3/19/2020 call date. AmTrust is a U.S.-based insurance company.

 Goldman Sachs Series J, 5.5% coupon (GS-J). Recent $24.92, yield 5.5%, 5/10/2023 call date. Goldman offers investment banking and investment management services.

•  Qwest Corp. 6.875% coupon (CTV). Recent $25.69, yield 6.7%, 10/1/2019 call date. Qwest, a unit of CenturyLink, Inc. (CTL), offers telecommunications services.

•  Seaspan Series E, 8.25% coupon (SSW-E). Recent $24.50, yield 8.4%, 2/13/19 call date. Seaspan owns more than 70 oceangoing container ships.

•  United States Cellular, 7.25% coupon (UZB). Recent $25.69, yield 7.1%, 12/8/19 call date. Majority owned by Telephone & Data Systems (TDS), U.S. Cellular (USM) is the fifth largest U.S. cellular company.

Preferreds ticker symbols are not standardized. The symbols I’ve listed can be used on MSN Money (money.msn.com) and TDAmeritrade (www.tdameritrade.com). When you’re ready to buy, use your broker’s symbol lookup function.

For more on evaluating preferreds, check the Preferred Stocks section of my Dividend Detective site (www.dividenddetective.com).

published 11/22/15

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