I am a big fan of preferred stocks. They used to be thought of as a bizarre security, but now preferred stock is a major target for income investors during the historically low bond-yield period we’ve been in for years.
The great thing about preferred stock is that it yields a lot more than, and offers almost equivalent security to, bonds. The notable thing about preferred stock is that while it can be riskier than bonds, the practical truth is that the risk is roughly equivalent. In addition, they trade like bonds. There is very little volatility with preferred stock, so not only do they tamp down the overall risk profile of a portfolio, they offer juicy yields.
That’s why I love these high-yield securities and they have a major position in my stock advisory newsletter, The Liberty Portfolio. Yield for a security reflects the risk for the security. With preferred stock, if the underlying company itself is solvent, then the preferred stock will be as well.
If a company goes under, bondholders get the first bite at assets, but then preferred stockholders come next, before common stockholders. I like these three preferred stock issuances, all of which yield more than 6%.
Preferred Stocks to Buy: Sunstone Hotel
In 2015, Sunstone Hotel Investors Inc. (NYSE:SHO) offered its Series F 6.45% cumulative preferred stock at $25 par value.
Sunstone has done quite well over the past few years, in a sector that has seen consistent growth and numerous acquisitions — particularly in the luxury sector. Revenue per room stats are rising, as is average daily rate. As the economy improves, more people will be taking vacations.
The proceeds that were used from this Series F paid off a higher yielding issue — the Series D, which paid 8%. That meant significant savings for SHO.
The market likes the Series F, with the shares now selling for $26, or 4% over par. Yield is still at 6.2%.
Preferred Stocks to Buy: Bank of America
Bank of America (NYSE:BAC) has a long history of preferred stock issuances. It continued that trend with a massive preferred stock offering of a 6.625% Series I preferred. BAC is finally on solid footing, and while it probably could get away with a cheaper offering, and since has, this holdover pays very well.
Now, the Preferred I Series is selling for $25.77, and that’s 3% above par. BAC does have the option of redeeming these shares anytime, so there is the possibility of losing 3% if you buy here and they do redeem the series.
I see that as unlikely, though, because BAC finally has it’s mojo back and would like to keep the capital.
At that price of $25.77, the yield is still a very attractive 6.43%.
Preferred Stocks to Buy: Goldman Sachs
Goldman Sachs (NYSE:GS) just reported earnings, and even though the numbers weren’t great and its trading business is suffering, it still had operating earnings in the billions. Thus, being able to pay on its 6.2% Non-Cumulative Preferred Stock, Series B, is not going to be an issue.
Goldman has also put out many preferred stock securities over the past few years, and is up to seven that are currently outstanding. However, three of those issues yield less than 4.5%, and so they trade below par. Investors obviously demand higher yields, which is why the rest trade above par.
The Series B trades at $25.85, and now yields 6% exactly.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected]