My always astute, if occasionally irritating, editor Kyle hit me with a question regarding preferred stocks. “What’s the case for owning individual preferred stocks over an ETF? Wouldn’t it only be to get a higher dividend yield?”
It’s a good question, but that doesn’t make ol’ Kyle any less irritating.
There’s nothing wrong with owning something like iShares US Preferred Stock (PFF) which offers a dividend yield of 6.6%. It’s a little dicey in that it isn’t terribly diversified, with 65% of its holdings coming from the financial sector. But then again, most preferred offerings come from financials anyway. The problem with a non-diversified ETF like this is that if the financial sector comes under pressure, the whole ETF may get taken down.
With individual issues, they may or may not get taken down, even if in the same sector. If the individual name has strong underlying fundamentals, it may get spared. On the other hand, if it doesn’t — if it gets caught up in the tsunami — you may find yourself with a generational buying opportunity. If your preferred stock’s underlying company is solid and is being shot down because it happens to be in the same sector, there’s an excuse to just buy more.
A classic example was the preferred shares of Ashford Hospitality Trust (AHT) during the financial crisis. The D series, for example, fell under $7. An astute investor would have recognized the company was in far better shape than its peers, bought the preferred stocks at that price and seen a huge capital gain appreciation.
Let’s move on to today’s preferred picks.
Preferred Stocks: New York Mortgage Trust (NYMT)
New York Mortgage Trust (NYMT) is a mortgage real estate investment trust, or mREIT, that acquires, invests in, finances and manages mortgage related securities. These mREITs are very much tied to interest rates, so while rates are low, the stocks will do well. NYMT common stock, in fact, yields more than 14%. Yet that’s why I would choose the New York Mortgage Trust 7.75% Preferred Series B (NYMTP).
As preferred stocks go, it is less volatile than the underlying and trades about 6% below par, thus giving it a dividend yield of 8.2%.
Preferred Stocks: Montpelier RE Holdings (MRH)
Montpelier RE Holdings (MRH) has an 8.875% Series A Preferred, currently trading at $27 — about 8.5% above par and callable in two years. Its dividend yield is thus 8.2%.
What I like about this issue is that Montpelier is a specialty insurer, with a large part of its business being re-insurance. That means when an insurance company gets hit with massive claims from things like airline crashes, war, political unrest or space aliens, the insurance company will pay out some big claims, but it will have purchased insurance for its own insurance payouts.
Montpelier is a stable business, with even more stable preferred stock, and it would take a hell of a lot of disasters in a row to put it under.
Preferred Stocks: Stag Industrial (STAG)
Finally, we have Stag Industrial (STAG) and it’s 9% Series A Preferred issue. STAG preferred stock focuses on single-tenant industrial properties. The advantage here is that a well-run REIT like Stag will carefully choose its tenants, selecting companies that are recession-proof, or at least have ample liquidity to pay rents. Occupancy is at 94%, and recent earnings came in with sizable growth across the board. The preferred stock trades almost 10% above par, and thus the dividend yield is 8.1%.
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Lawrence Meyers owns shares of AHT 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 firstname.lastname@example.org and follow his tweets at @ichabodscranium.