Readers of my column know that I love preferred stocks. I think they provide great dividend yield with minimal additional risk compared to bonds.
While fixed income investors have been toiling in the wasteland of low bond yields for years, investors in preferred stock have been enjoying higher yields, some capital gains and are sleeping well at night.
That’s because preferred stocks are, for all practical purposes, nearly as secure as bonds. Preferred stocks rest just below debt in the capital stack, so in the event of bankruptcy, preferreds will collect principal back only after the debtholders do. However, if you are investing in a company that has any chance of bankruptcy in the first place, I have to ask about your sanity.
Regardless, the stability of preferred stocks for shareholders, in a period where interest rates aren’t likely to rise much, is very attractive. Take a look at these three possibilities:
3 Preferred Stocks With 6% Dividends: Alexandria Real Estate Equities (ARE)
Alexandria Real Estate Equities (ARE) is one of several preferred stocks that only recently came on my radar. It’s a real estate investment trust (REIT) that focuses on high-quality assets in the life sciences and technology sector, in Boston, San Francisco, New York and San Diego.
The thing about life sciences is that America is not going to move backwards in this sector. It’s only going to continue moving forward and innovate, so the chances are that this REIT is going to see high occupancy for quite some time.
Indeed, ARE expects 97% occupancy this year.
The common stock pays 3.2%. However, the Series E Preferred is a 6.45% issuance, presently trading a dollar above par, at $26, giving it a 6% yield. As with all preferreds, you are giving up the potential for significant capital gains that you would have with the common, but you also eliminate the risk for capital losses.
3 Preferred Stocks With 6% Dividends: Aspen Insurance Holdings
Aspen Insurance Holdings (AHL) is a multi-line insurance and re-insurance company with an international presence, with “A” ratings issued by Standard & Poor’s and A.M Best. It holds nearly $11 billion in assets, of which $5 billion are gross reserves and $2.9 billion are written premiums.
Those written premiums are growing, too. They increased 7.4% year over year to $919 million. Its reinsurance line only netted $13.5 million in payouts in the first quarter. Its net income return on average entity came in at a very impressive 16.4%, with annualized operating return on average equity of 12.4%.
These are the kinds of numbers that make shareholders really happy.
Aspen invests its premiums in secure fixed income instruments with an average credit quality rating of “AA-“. It’s first-quarter yield was 1.1%, giving it an annualized return of 4.4%, with the average duration of fixed income investments at only 3.4 years.
The Preferred B Series is a 7.4% issuance trading at $26.25, which gives it a current yield of 6.9%. It isn’t callable for another two years, so paying 5% above par right now doesn’t trouble me.
3 Preferred Stocks With 6% Dividends: Colony Capital (CLNY)
Colony Capital (CLNY) came on my radar only because I happened to sit next to the CEO of one of its subsidiaries on a plane flight last year. This is a large REIT that specializes in many different types of real estate investments.
Distressed debt is one area that they’ve been focusing on, especially in Europe. Other areas include “light industrial,” which are smaller distribution buildings that are a key part of the logistics chain. The company also buys up diversified real estate portfolios with consistent cash flow.
The CEO I met managed Colony American Homes, which scoops up distressed single-family residential properties, and does so with a scalable and efficient process. They have an extensive team of professionals that can act quickly when opportunities arise.
I like the 7.5% Series B Preferred issue, trading at $25.50, and yielding 7.35%.
As of this writing, Lawrence Meyers held no positions in any of the aforementioned securities.