Bonds are not the greatest investment these days, given their low yields. In fact, for those seeking significant fixed income for their portfolios, the market is not providing tremendous opportunities — unless you know where to look.
Preferred stock can be a great way to find those yields with a relatively high degree of safety. As a reminder, they are stock-bond hybrids. They are issued and traded as stock. Their underlying price tends to move in very tight ranges, excepting periods of significant market volatility. They pay generous, regular dividends. Best of all, they take precedence over common stock dividends. So if a company cuts its dividends, it must cut the common first.
Among my favorite choices right now are Ashford Hospitality Trust (NYSE:AHT) Preferred Series D and Series E shares (specific Preferred tickers vary by broker). The Series D trades at 2% below its issuing price (“par value”) and pays $2.11 annually, or about 8.6%. During the worst of the economic crisis, when many wondered if hotel REITs would go out of business or default on their debt, Ashford carefully managed its liquidity and debt maturities. It did it so well that the Preferred D dividend never got cut. Since then, Ashford has added the Series E, which trades at par and yields a beautiful 9%.
HSBC Holdings (NYSE:HBC) Preferred Series H is another fairly solid play. Although I’m not always keen on buying financials, HSBC is in good enough shape for me to point this out. It yields 6.5% and trades just slightly over par. Some might say the fact the stock is rated “A” by the rating agencies should give one pause. Frankly, because of their conflicts of interest, I don’t pay attention to rating agencies and don’t trust them. My own assessment of the company and its balance sheet is what gives me confidence.
Case in point: U.S. Bancorp (NYSE:USB) is one of the very few banks that were not torpedoed by carrying large amounts of toxic assets on their balance sheets. U.S. Bancorp engaged in very conservative real estate underwriting and never has been in danger of the kind of insolvency feared of its larger, more famous brethren. The company’s Preferred D shares pay $0.49766 per share, or a 7.875% annual yield. Yet the security is rated “BBB,” lower than HSBC’s Preferred Series H. U.S. Bancorp is, in my opinion, on more solid footing.
Finally, I’d jump on Goldman Sachs (NYSE:GS) Series B shares. First, it’s Goldman Sachs. The publicity around the company might not be great, but it is not going bankrupt — ever — nor is its preferred stock in danger of losing its dividend payouts. The shares yield a solid 6.2%.
As always, it behooves you to do your own research. For my money, however, these seem like pretty solid choices.
Lawrence Meyers owns Ashford Hospitality Trust Preferred Series D shares.
