3 Highest Rated S&P Preferred Stocks

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Preferred stocks are stock-bond hybrids. They are issued like stock and trade on the stock exchanges, but trade more like bonds and have high yields that are comparable to junk bonds.

best dividend stocksBut preferred stock is usually much safer than junk bonds. The word “junk” refers to bonds that are assigned ratings by S&P and Moody’s that indicate they are “less than investment grade.” That means the businesses they are lent against have ongoing uncertainties that may be related to various factors involving the economy, its sector, or the business itself.

Often, the high yields of preferred stocks are greater than or equal to those of junk bonds and carry less risk. That’s why I like preferred stock.

Both S&P and Moody’s issue ratings on preferred stock just as they do with bonds. As with all such ratings, they aren’t meant as exact probabilities of default, but a more qualitative judgment on the health of the issue.

Here are the top three rated preferred stocks. Let’s look at them and the underlying businesses to see if they might be right for your portfolio.

Preferred Stocks — Wells Fargo (WFC)

wells fargo earnings wfc stock

Not surprisingly, Wells Fargo (WFC) has some of the top-rated preferred stocks on the market — all seven issuances. They are all rated BBB+, which S&P describes as having more than “Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.” That about describes Wells, which is in tremendously robust financial shape. It’d take another financial crisis to even come close to becoming unstable.

Which of its seven issuances should you choose? First, all are non-cumulative, meaning if WFC suspends those dividends for any reason, they will not accumulate and be paid later. None of them are called until December of 2017, so there’s no danger of being called away in the near future.

Next, they run from 5.125% to 8%. Obviously, you’d first look to the 8%, but that trades at 19% over par, and only yields 6.91% as a result. I think you go with the 6% Series T, which trades about 0.5% below par and still has a high yield of 6.03%.

Preferred Stocks — US Bancorp (USB)

USBancorp185US Bancorp (USB) has always been a solid bank as it never had much exposure to toxic mortgages. It’s in solid financial shape, and also carries S&P ratings of BBB+ on all four preferred stock issuances. In fact, it’s in such great shape that Warren Buffett holds more than 3% of the shares.

The 6.5% Series M is trading way above par, at $28.45. For something trading 14% over par value, it needs to yield a whole lot more than 5.71%. The risk is that the price falls back towards par and that high yield won’t matter much if you lose 14% of your investment. You’ve got the same problem with the 6% Series N, which trades at 8% over par and yields 5.56%.

There’s a 5.15% non-cumulative Series O which is callable in 2018. It yields 5.74% and trades almost 10% below par. So you’ve got a shot at some capital gains here as well.

The choice here, if you make one at all, is a little difficult. Remember, these just happen to be the highest-rated issuances. You don’t have to buy them. There are plenty of BBB issues as well.

Preferred Stocks — Public Storage (PSA)

public storage psa stock dividendPublic Storage (PSA) is a big winner in the financial crisis. Everyone got tossed out of their homes, had to move into apartments, and put everything in storage. The darn thing has 12 different series of preferred stock, ranging from 5.2% to 6.875% — although that one is callable early next year, so I’d avoid it.

In surveying all the offerings, I think I’d settle on the 5.9% Series S Preferred stock. The stock trades at $24.82, or 1% below par, and has a high yield of 5.96%. It isn’t cumulative, but that’s not of much concern since the BBB+ rating makes it unlikely that preferred dividends would be suspended. It isn’t callable until January of 2017.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. 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 pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/preferred-stocks-high-yield/.

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