Preferred stock is issued by a company to raise capital for a variety of uses. It isn’t equity that provides direct ownership in the company, and it isn’t debt, which usually requires some kind of collateral to secure the debt. Preferred stocks reside below company bonds and bank obligations in the capital stack, but above common stock.
Thus, should the company become insolvent, any assets or cash flow are first paid to satisfy debt obligations, since those were likely pledged as collateral. If any assets are left over, they are then disbursed to preferred stockholders before common stockholders get anything back.
Preferred dividends cannot be cut or suspended unless common stock dividends are cut first. In fact, most preferred dividends are cumulative, so they still accrue even when a dividend is cut or suspended, and they must be paid out before common stock dividends resume.
The big attraction of preferred stocks is dividend yield. Most pay above 5% annually, and can pay 9% or more. As a result, some trade above the par value that they were originally issued at because investors are willing to pay a bit more than par to obtain the higher yield.
I love preferred stock because they pay so much more than bonds, and if you choose the right companies, the risk is functionally equivalent to bonds. What matters most with preferred stock is whether the company is solvent, and if it has enough cash flow to pay both the preferred and common dividends.
Don’t Overlook Ashford Hospitality
Ashford Hospitality Trust Series D 8.45% Cumulative Preferred (NYSE:AHT-PD) focuses on full-service upscale and upper-upscale properties and has well over 100 hotels, several condo units at a WorldQuest resort in Florida, an ownership stake in its own spun-off management company.
If we strip the hotel business down to its essence, its about borrowing money at low cost, building or purchasing a hotel with that borrowed money, generating enough revenue to pay its expenses, pay loan interest, and have plenty of money left over to throw off dividends to shareholders. Everything beyond this is some variation or complication of this model.
Otherwise, there’s a right time and wrong time to own hotels. Usually, hotel demand roughly tracks with GDP growth. In the past several years, not only has this been true, but until recently, the demand for hotels outstripped supply. Thus, it’s been good times for the industry.
Chinese investors flew in and started buying up luxury properties, as wealthy businessmen are keen to get their money out of China.
AHT has managed its financial position brilliantly over the years. The Preferred D shares trade a bit above par but the 8.45% yield is fantastic.
Public Storage Is a Hot Property
I love Public Storage (NYSE:PSA) as a company. I actually think of it not as a storage company but more like a quasi-timeshare. Build a building with many units and rent them all out on short or long-term bases.
Storage need is on the rise because a lot of people got kicked out of their homes during the housing crisis. They needed somewhere to live and often end up in an apartment, which doesn’t have enough space for all their stuff, so they use storage facilities. Here in Los Angeles, there is a huge housing crunch, so storage is big.
Public Storage funds many of its expenses with preferred stock, and often has many issuances trading at any one time. 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 13 different preferred stocks on the market as I write! Their yields run from 4.9% to 6.375%. Those with lower yields trade below par. I like the Series U Cumulative Preferred, trading at $24.89 and yielding 5.625%.
Preferred stocks can also be value plays. If the market perceives a company to be in trouble, the preferred stocks can sell off. The hotel REITs sold off into single digits during the financial crisis, for example.
Costamere Shipping Is Back
The oil price crash devastated shipping companies, such as Costamare Inc (NYSE:CMRE), an owner and charterer of containerships. It had a fleet of over 70 ships, but when demand for energy cratered, shipping companies suddenly had nothing to ship.
CMRE was in trouble but it has come out of bad times. About two years ago, the 7.625% Preferred B Cumulative shares were selling in teens.
Today that issue is at $23.32. So there are still some potential capital gains to get back to par on top of the high yield. The good news is CMRE has underlying strength on its balance sheet.
It has earned a profit each of the last few years and is running with positive free cash flow. It had to cut its common dividend, which is why the preferred stock sold off, but things have turned around.
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 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com