I am as big an advocate for preferred stocks as you will ever find. Once thought to be exotic securities that nobody understood, preferred stocks found favor when bond yields collapsed and fixed-income investors were forced to hunt down other opportunities.
Because bond yields have been so low, it has made the low risk already associated with preferred stocks even lower. The primary risk with preferred stocks was always that some other investment would come along and challenge their 6-9% yields. That hasn’t been the case for a very long time.
The second area of risk is always related to individual issues. You want to stay away from companies where the risk of insolvency is somewhat elevated. While preferred stock is ahead of common stock in the capital stack, nobody wants to end up with either a suspended dividend or having to chase down their principal in bankruptcy.
That’s not the case with these three selections, though.
Here are three high-yield preferred stocks to keep the income flowing.
Preferred Stocks: Captial One Financial (COF)
Preferred stock: Capital One Financial Series P
Financial stocks are the most frequent issuers of preferred stock. You may want to have a look at Capital One Financial (COF) Series P 6% Non-Cumulative Perpetual Preferred Stock. The yield is 6.05% because the preferred stock trades just below its $25 par value, at $24.77. That means that the market is actually discounting its value by about 1%. This makes no sense to me.
The reason is probably because COF offers two other preferred stocks that pay a bit more in yield. However, they also trade above par. Why is par value important? Because the company could buy back the shares at $25 at some point in the future — as early as Sept. 1, 2017 for this issue. Ideally, you don’t want to buy above par and have the shares redeemed.
Companies rarely redeem their preferred stocks, but it does happen.
Preferred Stocks: Essex Property Trust (ESS)
Preferred stock: Essex Property Trust Series H
Essex Property Trust (ESS) Series H 7.125% Cumulative Redeemable Preferred Stock pays 6.87% dividend yield because it does trade above par at $25.95. So why buy an above-par issue when the call date is April 1 of next year? Because I don’t think Essex is going to call this issue.
The company only has $65 million in cash on hand, and it is deploying capital to purchase real estate around the country right now. It isn’t going to spend money to pull the preferred stock back in, not when it would just have to issue new stock. It just issued almost 400,000 shares in common stock to raise $88 million.
Essex remains at the top of its game as far as being a REIT. While you give up possible capital gains and a 2.5% yield by avoiding the common stock, you collect that solid dividend on the preferred and incur less risk in the process.
Preferred Stocks: Public Storage (PSA)
Preferred stock: Public Storage Series T
Finally, one of the biggest issuers of preferred stock and one of the big players in the storage space is Public Storage (PSA). I found 12 active issues of preferred stock from PSA, and their issues run the gamut from 5.2% dividend yield to 6.875%. Not surprisingly, as one moves up in dividend yield, the higher above par the issue is trading at.
So I would look at the Series T 5.75% Cumulative Preferred Stock, which trades at $25.00 and throws off that nice 5.75% dividend yield. Since bottoming out in the financial crisis at $55 per common share, PSA has risen four-fold. It is an incredibly solvent operation — so much so that it has paid down nearly all of its debt, which is practically unheard of for a REIT.
That kind of solvency places PSA in a unique position as far as REITs go, and its preferred stock is a great vehicle to play for the dividend yield if you worry the stock is too far ahead of itself.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.