by Lawrence Meyers | February 5, 2014 2:59 pm
Preferred stocks are the unsung heroes of dividend yield.
Preferreds only really started to get attention when bond yields cratered, sending dividend investors on the hunt for other sources of fixed income. And I have to admit, when I found preferred stocks, I fell in love.
After all, preferred stocks have many of the advantages of bonds in that they trade in very tight range, they pay a regular dividend, and they are higher up in the capital stack than equity. In addition, if a company is forced to reduce dividends, it must first kill the dividend to the common stock before the preferred stock.
Before the picks, a few educational notes: Preferred stocks you’ll want to avoid are those whose companies have already cut common dividends, indicating the company is struggling with its cash position and income generation. You’ll also want to avoid preferred stocks trading substantially above par, or the price they were originally offered at. Most preferred stocks are “callable,” which means the company can pay the issuing price for shares after a certain date. You don’t want to buy a preferred stock at $28 and have it called at $25. It’s OK to pay a slight premium, but not too much.
Now, onto those preferred stocks to buy:
Dividend Yield: 8.45%
Of all the preferred stocks out there, I’ve written most frequently about Ashford Hospitality Trust (AHT) Series D 8.45% preferred stock.
I love this hotel REIT and its stock for many reasons. Ashford Hospitality Trust is extremely well-managed, boasting management that has been in the hotel business for 24 years. Leadership has shown deftness and creativity with the company’s financing over the years.
During the financial crisis, when virtually every other hotel REIT cut both common and preferred dividends, Ashford never cut its preferred stock. It negotiated loan maturities out several years. It purchased interest rate derivatives called “flooridors” that generated additional income while the hotel business was in the toilet.
I’ve owned these shares for quite some time, and I suggest owning them for the long term. Ashford’s D shares trade just slightly over their $25 issuing price and yield a very attractive 8.45%.
(Note: Tickers for many preferred stocks vary based on the research or trading platform you are using.)
Dividend Yield: 6.58%
I also like both Public Storage (PSA) and its Series T preferred stock.
As a result of the financial crisis, many people lost their homes. What happens when people get evicted from a house? They downsize. That’s one reason we’ve seen apartment REIT stock prices appreciate, but that’s also why Public Storage has done so well. You can’t fit a household’s worth of stuff into an apartment, so you rent storage for all those extra-large sofas. Housing remains troubled, and with people increasingly being moved into part-time jobs or leaving the workforce, this overall secular trend is continuing.
Public Storage has 10 different series of preferred stock, but I like the Series T because it trades at $21.83, which is more than 12% below par. I don’t see any reason for this discount, and it also boosts the 5.75% dividend (at par) to 6.58% at the current price.
Dividend Yield: 6.6%
Of course, if you’re worried about picking the right preferred stock, you can always go with an ETF, which offers diversification.
There are a few preferred ETFs floating around, but one I favor is the PowerShares Preferred Portfolio (PGX). Most preferred ETFs are heavily weighted toward financials, and this is no exception. However, I’m not as concerned as I used to be about financials, and this ETF is globally diversified, which puts me a little more at ease. PGX currently yields 6.6%.
As of this writing, Lawrence Meyers held AHT Preferred D series shares. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.
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