I was speaking with a money manager the other day, and we were assessing interest rates and the situation with bonds. I wondered aloud why anyone would be holding bonds at this time, unless it was part of a long-term diversified portfolio, of which the bond portion is really just a place to park cash.
He said, “I would not advise anyone to own bonds right now.”
I completely agree. The only direction right now for interest rates is up, and only in tiny amounts, meaning they will not provide attractive returns for the foreseeable future. Moreover, increasing rates means a decline in bond value, so bond holders get slapped with capital losses.
That’s why preferred stocks have been my go-to income investment for several years. They behave just like bonds, but offer dividends of 5% to 9% without the associated downside risk to price. There is some risk, but not much.
So, let’s look at three of the best preferred stocks for income-hungry investors.
Ashford Hospitality Trust Series D Preferred (AHT-D)
Preferred Stock Yield: 8.45%
I’ve written about it before, and I’ll write about it again, but Ashford Hospitality Trust Series D Preferred (AHT-PD) remains the single best preferred stock on the market.
The reasons are plentiful. For starters, Ashford is the best managed hotel REIT on the market. The CEO has more than 25 years experience in hotels, and is surrounded by other management with the best, most comprehensive, knowledge of hospitality in the business.
While other hotel REITs were struggling during the financial crisis, Ashford calmly steered itself through by proactively drawing down credit lines to maintain liquidity, re-negotiating debt maturities to push them farther out, cutting property expenses by 20% to reflect the large drops in hotel revenues, and engaging in interest rate hedges that generated additional income.
The company is now moving into more upscale properties to maximize shareholder value. Grab this 8.45% preferred stock now.
Bank of America Corp. Preferred I (BAC-I)
Preferred Stock Yield: 6.625%
You will often find great preferred stocks offered by financial companies. For all the hand-wringing over Bank of America (BAC), the company has several issues of preferred stock that are all worth looking at. I like the Series I 6.625% Non-Cumulative Preferred Stock. Although it trades at 5% over par, I see little chance of the price falling very much — like most preferred stock.
Bank of America is on much more solid footing than I think the market wants to admit. I think a lot of this has to do with poor PR management. The company hasn’t gotten out there and repeatedly hammered the table on the resiliency of its current business and where the bank is headed.
The company just needs to sit back, be comfortable in how it operates, and let things sort themselves out as they come.
Prudential Preferred Series I (PUK-PI)
Preferred Stock Yield: 6.75%
Insurance companies are another great place to find preferred stocks. The reason is that insurance companies often need to raise capital to fund operations and reserves early in their existence, or when they’re growing. Rather than dilute shareholders, or issue more debt, preferred stock allows them to raise that capital without having to suffer either consequence.
Prudential PLC Non-Cumulative Preferred Series I (PUK-I) is a 6.75% non-cumulative preferred that suits that exact purpose. “Non-cumulative” means that, should the preferred dividend ever get suspended, that missed dividend payments do not accrue to be paid out should the dividend be reinstated.
Most issues are cumulative, so dividends would accrue and be paid out. However, with a company as solid as Prudential, I don’t really mind if it is non-cumulative. The odds are so long that such a thing would ever occur, I don’t expect it to ever come up.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AHT and AHT-PD. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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