Junk bonds, also known as high-yield bonds, sound like a great idea when the economy is in decent shape. Yet, throw in low oil prices, a falling stock market and some dubious employment data, and suddenly those junk bonds begin falling in price.
That’s because junk bonds are bonds whose underlying issuers are in the weakest financial shape, thus they’re least able to handle any kind of cash flow stress. Right now, we’re seeing energy sector junk bonds get hit the most, especially those involving fracking.
As oil prices fall, frackers can’t as much money for the oil they produce, which means less cash flow and trouble making bond payments.
So while some junk bond exchange-traded funds are down 20%, you may want to look for more stable places for high yields, and that means preferred stock.
Preferred Stocks to Buy: Ashford Hospitality Trust, Inc. (AHT-D)
Dividend Yield: 8.9%
Ashford Hospitality Trust, Inc. (AHT-D) Series D Preferred stock is my favorite preferred issuance right now. Remember that preferred stock is below bonds in the capital stack, so if we choose a solid company that always makes its payments, then we can buy into preferred stock with less risk.
Ashford not only survived the financial crisis, but it was virtually the only hotel real estate investment trust that did so without cutting its preferred dividend. That’s how well it managed its debt (which is not junk, by the way). Thus, I cannot think of a better preferred stock.
Because there are some pointless concerns regarding Ashford, the Preferred D is trading about 13% below par, something it hasn’t done in ages. Thus, not only can you pick up that 13% when the market decides to price it properly again, but you get the $2.12 yield every year, which is about 8.9%.
That’s far safer, and far higher than anything you’ll see with a junk bond.
Preferred Stocks to Buy: Public Storage (PSA)
Dividend Yield: 5.5% (U Series), 5.17% (X Series)
Public Storage (PSA) loves to fund many of its expenses with preferred stock. For a company, it means it is basically issuing debt that trades like a stock without the voting power. Thus, it just needs to make its dividend payments and it will be left alone.
Public Storage has 12 different preferred stocks trading right now. Most are trading just slightly above par, but only two trade at more than 3% above their $25 issuing price.
You’ve got many choices here. The U Series has a nominal yield of 5.5%, but trades at $25.55, giving it a current yield of 5.5%. It cannot be called until June of next year; but be aware, the company often calls its preferred stock. That means it will pay holders $25 per share if it chooses to, on or after June 15, 2017.
The X Series trades at $25.16 and pays 5.17%, but isn’t callable until March of 2018.
Preferred Stocks to Buy: Texas Capital Bancshares Inc (TCBIP)
Dividend Yield: 6.9%
I also think a rather unique bank, Texas Capital Bancshares Inc (TCBI), has an attractive preferred stock offering. Because this is a regional bank, not many people are familiar with it, especially since it was only founded in 1996.
Although it offers all the same types of products that you would expect of any bank, it also offers wealth management services, and specialized lending products. It has only 12 branches, but is very profitable.
Due to its lack of familiarity, it has preferred stock that trades as Texas Capital Bancshares (TCBIP), and is trading 4% below par at $23.99, while yielding a very attractive 6.9%. It is not callable until June 15, 2018.
One thing to note about it, however, is that it is non-cumulative. Normally, if a preferred stock has to suspend a dividend (if it ever offers it again) it must also pay all the dividend payments that it missed. Non-cumulative means that those catch-up payments are not required.
As of this writing, Lawrence Meyers owned shares of AHT Series D Preferred stock.