Preferred stocks were a total mystery to investors until bond yields began to fall and income investors went hunting for yield. Now, preferred are very popular, as evidenced by their pricing; many of them are trading slightly above par.
Preferred stocks are issued for a capital raise that are used for whatever the prospectus indicates. However, there is a crucial difference between this and regular equity, in that a preferred share does not represent company ownership. Nor is it debt insomuch as there is no collateral behind it.
Preferreds offer higher yields than bonds, though, because they sit behind bonds in the capital stack. In other words, if the company goes bankrupt, then debt obligations are paid first with available collateral. Anything left after that next gets distributed to the preferred shareholders
One thing I love about many (but not all) preferreds is that their dividends are cumulative, thus accruing should a dividend be suspended, and must be paid in full before common stock dividends get paid again.
Here are three preferred stocks I like right now that yield between 6% and 10%.
Preferred Stocks Yielding 7% or More: Digital Realty Trust Series H
Dividend Yield: 6.7%
Digital Realty Trust, Inc. (NYSE:DLR) is actually a real estate investment trust (REIT) whose common stock pays a 3.9% dividend. However, right now I like its Series H 7.375% Preferred Stock, which presently trades at $27.54.
Because these preferreds are trading well above par, the yield has been knocked down to 6.7%. I would suggest waiting to see if the price falls back under $27 (at least). If you’re patient and can wait for a drop, I suggest looking closely at these preferred shares.
Digital Realty has properties where different types of technology companies store their datacenters, operational activity technology and all other kinds of back-of-house stuff that is way above most of our pay grades. It has 62 properties in the U.S. and 13 in Europe from which it generates terrific cash flow to pay its bills and its dividends.
While DLR has about $6 billion of total debt, almost all of it is unsecured, so it is in fine shape.
Preferred Stocks Yielding 7% or More: Costamare Series B
Dividend Yield: 9.7%
Are you looking for something that has more risk attached to it, but with potentially more reward? Then take a deep breath and look at Costamare Inc’s (NYSE:CMRE) 7.625% Cumulative Preferred B Series shares.
CMRE is an owner and charterer of containerships to liner companies, with 72 such ships. Demand for oil and energy fell over the past few years (and with it, oil prices), and thus all these cargo ships lugging energy around saw their business deflate.
Some of these companies are in big trouble. CMRE has some challenges, but so far things seem to be OK. While other companies are seeing losses, Costamare has been able to remain profitable, including last quarter’s reported earnings of 37 cents per share on $118 million in revenue.
Costamare has a list of charter deals, including extensions, and that is keeping it solvent. It is paying its common dividend, and thus is also paying on its preferred stock.
However, the Series B preferreds trade at $19.85. Thus, you get an effective yield of 9.6% … and as much as 23% upside should the stock return to par!
Preferred Stocks Yielding 7% or More: W.P. Glimcher Trust Series I
Dividend Yield: 6.8%
If you want to keep your risk more normalized, going back to real estate is a solid move. W.P. Glimcher Trust (NYSE:WPG) — formed after Washington Prime Group and Glimcher Realty Trust merged — is a mall-driven REIT, with 114 properties in total, spread across the country. Its tenants are big, well-known retailers who pay solid and reliable rent, such that it has about 3.5x debt service coverage.
WPG also has plenty of liquidity, which we always like to see with a REIT. More than 55% of its portfolio is unencumbered, and 80% of its net income comes from top-tier properties. As it is, the common stock may be worth looking at.
However, the 6.875% cumulative preferred shares Series I stock, which trades right around par, is more interesting to me.
Note: These shares can be called in March 2018, but that doesn’t necessarily mean they will be. Just be aware.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].