Preferred stocks are finally making it onto investors’ radars. And it’s about time.
Nobody really understood these securities until recently, but they are now an important part of any diversified portfolio.
Preferred stocks offer stellar yields and make a great replacement for those low-yielding bonds that are taking up space in your portfolio like those dusty hand-me-downs in your attic. They offer low volatility, as they only get bought and sold in large volume in times of extreme market distress. They also are safer than common stock dividends, which are the first to get cut in a liquidity crisis.
There really are only two things to consider when looking for the right preferred stock:
- Choose a company that is not undergoing a liquidity crisis. You’d want to avoid those companies anyway, but you don’t want to get trapped in a preferred that’s about to have its dividend cut, because that often means the company has taken a big step toward bankruptcy.
- Choose a preferred stock that is not callable in the near future and is trading over par. So if Joe’s Donuts Preferred A stock was issued at $25, and it’s trading at $27, and is callable in January 2013, you better be careful or you’ll have that preferred potentially taken away from you at $25.
Here are five preferred stocks investors should seek out (note: symbols for preferreds depend on your broker):
Ashford Hospitality Trust (NYSE:AHT), a hotel real estate investment trust, has an 8.45% Preferred D Series trading at $25.40. Ashford was just about the only hotel stock that didn’t cut its preferred dividend during the financial crisis. It has ample liquidity, drastically cut hotel operating costs to keep pace with the decline in revenue, and always has had extraordinary leverage to push out and/or refinance debt maturities by several years.
Public Storage (NYSE:PSA), another REIT, has a solid 6.5% Preferred Q Series. Now, I don’t like that the stock trades at $28.25 — some 13% above par, which pushes the yield down to 5.77%. However, this company is in such solid shape financially, and the series isn’t callable until 2016, that I have no problem owning it here. The company has $438 million in cash, exceeding its $368 million in debt, and generates more than a billion dollars in annual free cash flow. Even the common stock, like Ashford’s, is a good deal.
I was very pessimistic about Bank of America (NYSE:BAC) but recently reversed course on the company. The bank has about a zillion series of preferred shares. Don’t bother going for the ones with the $1,011 dividend, though — those belong to Warren Buffett. That said, these preferreds all non-cumulative shares, which means if the bank suspends its preferred dividends, they do not accumulate and get paid out to you if they ever reinstate them. I don’t see that happening, though. The Series H seems attractive, but the call date is next May, so you’ll only get two more payouts, and the stock trades just slightly over par. I might look at the Series I, which trades at 6% over par and yields about 6.25%.
Digital Realty Trust (NYSE:DLR) is a fast-growing REIT in the technology arena. The common pays 4.8% as it is, but the series E Preferred yields 7%. It does, however, trade 10% over par, but is not callable until 2016.
Finally we have JPMorgan Chase (NYSE:JPM) Series C, which is a 6.7% issuance trading at 5% over par, so it yields closer to 6.3%. As banks go, they don’t get much more solid than JPM.
Lawrence Meyers owns shares of AHT and AHT Preferred D. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.