In normal markets, preferred stocks offer a low-risk
way to earn 4% to 7% annualized dividends. But the current market is
anything but normal.
Consequently, picking the right preferreds could open
up the opportunity to score 10% to 20% capital gains on top of
higher than expected dividend yields.
Details in a minute. But first some things you need
to know about preferreds.
Corporations issue preferreds to raise cash. Although traded the
same way as common stocks, preferreds are more like bonds. Normally,
you buy them for the steady dividends.
About Preferreds
When a
company issues a preferred stock, it sets the annual dividend and
sells the shares at a preset price, typically $25. In normal
markets, $25 preferreds usually trade up to $26 to $28 per share
range.
Most
preferreds are callable, meaning that the issuer has the right to
call (redeem) them at the call price, normally the issue price,
after a specified date (call date), typically five-years after
issue. Consequently, preferreds trading above $26 usually trade back
down to the $25 to $26 range as the call date approaches.
But these are not normal times
Thanks
to rising interest rates, many $25 preferreds are currently trading
in the $20 to $23 per share range because of competition from
Treasury Bonds, which are perceived as safer. But the only major
risk of holding preferreds is that the preferred issuer runs short
of the cash needed to pay the specified dividends. If that doesnt
happen, most preferred will likely trade back up to their normal
trading range if and when the market normalizes.
Identifying Low-Risk
Preferreds
Fortunately, at a preferreds issuers request, bond rating agencies
such as Moodys and Standard & Poors (S&P) can be hired to rate
each preferreds safety. Each agencies credit ratings can be
grouped into two major categories, investment grade and below
investment quality, a.k.a. junk bonds.
For
this column, Im using the S&Ps ratings to limit my list to
investment grade preferreds. For S&P, investment quality risk
ratings include: AAA, AA, BBB+, BBB and BBB-. Heres my list.
Five Recommended Preferreds
Allstate Coupon Rate
5.10% Series H (ticker ALL-PH), 6.3% market yield, 23% potential
upside, S&P rating BBB
Bank of America 5.38%
Series M (BAC-PM), 6.1% yield, 14% upside, S&P BBB-
Oaktree Capital Group
6.625% Series A (OAK-PA), 7.7% yield, 17% upside, S&P BBB
RenaissanceRe Holdings
5.75% Series F (RNR-PF), 6.7% yield, 15% upside, S&P BBB
W.R. Berkley 5.70%
Series E (WRB-PE), 6.4% yield, 12% upside, S&P BBB-
Each listing includes these definitions
Coupon Rate: preferreds annual interest rate based
on $25 per share issue price.
Market Yield: annual interest rate youd earn based
on recent trading price.
Upside: capital appreciation potential should the
preferred trade back up to its $25 issue price.
S&P
credit rating
One
more thing you need to know: preferred stock ticker symbols are not
standardized and vary from site to site. However they typically
start with the issuer's common stock symbol and end with the series
designator. For instance, the ticker for Bank of America (BAC)
Series M preferreds might be BAC-M, BAC-PM, BACPRM, etc. Our
listings use Yahoos ticker symbols.
When youre ready to
buy, use your brokers symbol lookup function.
As usual, those are my ideas. Do your own research.
The more you know about a pick, the better your results.
