Preferred stocks — one of my favorite sources of high yield — were really discovered en masse by investors just a few years ago.
It’s hard to say what it was. Maybe people didn’t really understand preferred stocks’ nature as “stock-bond hybrids,” which makes them feel exotic, and maybe now they realize that they aren’t all that complex.
Or, maybe people just finally caught wise to the fact that preferred stocks offer really great dividends that are given preference over common dividends if a cash crunch should hit a company.
It’s usually not a good idea to chase yield, but when it comes to preferred stocks, there are times that it isn’t a terrible idea when the payouts are so darn attractive. Here are a few preferred shares to consider:
Preferred Stocks to Buy: Ashford Hospitality Trust Series D Preferred*
Current Dividend Yield: 8.3%
I know, I know … I love Ashford Hospitality Trust (AHT), a hotel real estate investment trust (REIT) that I have owned off and on ever since its initial public offering in 2003.
The truth is that Ashford is the single best run hotel REIT in the nation, never cut its preferred dividends during the financial crisis, has plenty of liquidity and has crackerjack debt management.
Even better, Ashford has a Series D Preferred priced at 8.45%, and currently yielding 8.3%. It trades at less than 2% above par. There’s also a 9% Series E that yields about the same, but trades well above par, so I’d go with the former.
*Note: Trading symbols for preferred stocks vary based on who your broker is. Call your broker for symbols.
Preferred Stocks to Buy: Bank of America Series I
Current Dividend Yield: 6.5%
Another compelling selection is any one of several preferred stock choices for Bank of America (BAC).
I’m listing BofA not only because some choices are really good ones, but to point out that they are what’s called “non-cumulative.” This means if the company suspends its preferred dividends, the payments you were supposed to get do not accumulate and get paid if they bank ever reinstated them. So, there’s a bit more risk.
However, this is extremely unlikely to play out, as BAC has returned to full solvency and is stress-test-approved.
In this case, check out the 6.625% Series I, which trades at only 2% over par.
Preferred Stocks to Buy: CubeSmart Series A
Current Dividend Yield: 7.3%
Then there’s CubeSmart (CUBE), a public storage real estate investment trust (REIT).
I’m listing this even though CubeSmart has some serious challenges — most noticeably to me, CubeSmart is running free cash flow-negative. And its CubeSmart’s 7.75% Series A shares trade about 5% above par, which is a little high.
On the flip side, CubeSmart is experiencing strong growth in some big markets. Overall, in Q4, the company saw a 6.7% year-over-year improvement in revenues. The Philadelphia/South Jersey portfolio saw a 9.8% revenue increase, with Austin/Houston increasing 8.8%.
This is a perfect example of a company where you need to evaluate your risk carefully. I think you’re safe with the Series A shares, but it doesn’t mean you shouldn’t keep monitoring CubeSmart down the road.
Preferred Stocks to Buy: DuPont Fabros Technology Series B
Now let’s look at another REIT with attractive preferred shares.
DuPont Fabros Technology (DFT) involves real estate devoted to data center facilities. The human race has so much data to store and move around that substantial real estate is required for storage, so it’s a storage REIT of a different kind, I suppose.
Also, DuPont Fabros is not a cash cow, but it definitely holds it own. In fact, the common stock pays a 5.8% dividend.
But the real dividends come from the 7.625% Series B Preferred shares, which trade just above par.
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As of this writing, Lawrence Meyers held shares of AHT, BAC, and AHT Preferred D. 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 protected] and follow his tweets @ichabodscranium.