I’m in love with preferred stocks. In a period where the Federal Reserve has killed yield, these little buggers have provided dividends galore, usually exceeding 6%, and often approaching 9%.
Because preferred stocks resemble bonds in so many ways, they trade like bonds, meaning they move in very small ranges.
They also, by nature, offer very high yields compared to risk. Here’s why:
For preferreds to blow up, the underlying company has to be in serious financial trouble. That trouble has to be so great that the company has to cut its common dividend, which it is required to do before cutting the preferred.
Of course, if a company is so poor at generating free cash flow that it must cut its dividend, then you shouldn’t have bought the preferreds in the first place.
Today, we won’t be looking at companies where this is an issue. Here are three particularly low-risk preferred stocks to buy.
Low-Risk Preferred Stocks to Buy: Ashford Hospitality Trust, Inc. (AHT)
AHT-D Dividend Yield: 8.42%
AHT-E Dividend Yield: 9%
Yes, yes … I know that every time I write about preferred stocks, I write about those issued by Ashford Hospitality Trust, Inc. (AHT). Yet the truth is that its Series D (AHT-D) and Series E (AHT-E) shares may be the lowest risk of all preferreds because they’ve already been through the worst of times, survived, and were not even cut.
I’m talking about the financial crisis.
Every other hotel real estate investment trust cut its common and preferred, but Ashford did not. It even repurchased some of the D Series.
However, there have been some new developments. The preferred stocks for Ashford fell during an ongoing proxy fight. The D Series fell to about $20, a whopping 28% below par. Now it is back at $25. The E Series had broken the $26 barrier, but is now down to $25.
Both are great choices for your portfolio.
Low-Risk Preferred Stocks to Buy: Public Storage (PSA)
PSA-S Dividend Yield: 5.76%
I am also in love with the Preferreds of Public Storage (PSA). Everything that’s happened in the U.S. economy over the last 10 years has been bullish for Public Storage, and will probably continue to be for a long time.
First, housing prices soared so that those in apartments stayed in apartments as they got priced out of the market.
Guess what? They had to use storage.
Then the market collapsed and a lot of people got kicked out of their homes and had to downsize, requiring them to put things in storage. Now the rental market is going through the roof, and rents are rising, forcing millennials to move in with their parents … and put their stuff in storage.
Say hello to the 5.9% Preferred S Series (PSA-S). It’s trading above par at $25.61, which does drag the yield down to 5.76%, but the price indicates optimism about the underlying company.
Most preferred stocks come from financial companies. Now you do have to be careful to some extent with these because you don’t want a financial company with a deceptive position in regards to its solvency. So I stick with the big players of which there are many.
Low-Risk Preferred Stocks to Buy: Capital One Financial Corp. (COF)
COF-P Dividend Yield: 5.79%
I like the way Capital One Financial Corp. (COF) has been expanding and diversifying.
It has a robust credit card business, and I particularly like that it is making small-ticket commercial loans. This is an area most banks have totally ignored. They are afraid of it and they think there’s no money in it. There’s a TON of money in it, and if you underwrite properly, a bank can generate big money because these tend to be high-yield loans.
There are several choices for the preferreds here, but I like the 6% Series B (COF-P) stock. It trades at $25.9, which much like PSA-S, shows the market’s optimism for the underlying company.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. 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 [email protected]. As of this writing, he was long AHT and AHT Preferred D.