With many analysts
predicting a flat market for the balance of the year, this may be a
good time to take another look at preferred stocks.
Although they trade like common stocks, preferreds
are more like bonds. Most investors buy them for dividend income,
not capital appreciation. And that income can be substantial. Many
preferreds are currently paying dividends equating to 4% to 7% yields.
Although preferred share prices will fall in a down
market, they usually don’t drop as much as common stocks and, as
long as they keep paying the specified dividends, they eventually
Thus, priority number one is sticking with preferreds
issued by firms with strong balance sheets. You don’t have to don
green eyeshades to do that. Start by sticking with preferred issued
by firms generating positive free cash flow and with their common
shares trading for at least $20 per share.
Checking for free cash flow is easier than you think.
On Yahoo Finance (finance.
yahoo.com), get a price quote, click on “financials” and then
select “cash flow.” Focus on the left-hand TTM (trailing 12 months)
column. Free cash flow is listed at the bottom.
Although prices can vary,
preferreds are usually issued at $25 per share with coupon rates in
the 3%-7% range. Most preferreds can be called (redeemed) five years
later at the issue price. However, the issuer isn’t required to call
the preferreds on the call date, and many preferreds are not called
for years after the call date. The determining factor is whether the
issuer could sell new preferreds at lower coupon rates than your
preferreds are paying.
Preferred share prices vary
with supply and demand and typically move up to the $27 to $28 per
share trading range. If you hold preferreds trading significantly
above the call price, and you think they could be called, you should
sell them at least six months before the call date to avoid taking a
big loss when they are called.
Market yield is the
return based on the current trading price. For instance, the market
yield for a preferred trading at $26 per share and paying $2.00 per
share annually would be 7.7%.
Yield-to-call is the
average annual return you would earn if your preferreds were called
at their call price on their call date. In practice that’s a worst
case scenario because most preferreds aren’t called that soon.
Here are four interesting
preferreds. All were issued at $25 per share.
Partner 5.00% Series 14 (BIP-B). Brookfield, based in Canada,
owns utility, transport, energy and infrastructure asserts in North
and South America, Asia and Europe. Recently traded at $25.69 per
share. Market yield is 4.9% and yield-to-call is 4.3%.
Carlyle Finance 4.625%
Subordinated Notes (CGABL): Carlyle, with $260 billion of
assets under management, is a global player focusing on private
equity, credit and investment opportunities. Recently traded at
$25.46 per share. Market yield is 4.5% and yield-to-call is 4.2%.
Franchise Group 7.50%
Series A (FRGAP): Originally Liberty Tax Services, began
operating at Franchise Group in November 2019 with the goal of
accumulating a list of franchisable businesses with strong growth
prospects. Recently traded at $25.96 per share. Market yield is 7.2%
and yield-to-call is 6.5%.
SCE Trust IV, 5.375% Series
A (SCE-J): Issued by Edison International, which operates
Southern California Edison, a utility. Recently traded at $25.30 per
share. Market yield is5.3% and yield-to-call is 5.1%.
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 finding the best
preferreds, download my free