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APRIL 2020

Issue 157


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In This Issue:

High Quality Preferred Stocks

Preferred Stock News

Special Announcement

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by Doug K. Le Du


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Top Investment Grade, Cumulative Preferreds Available Under $25



Back in 2008, the Global Credit Crisis delivered huge returns to preferred stock investors who used the ten preferred stock selection criteria found in my book, Preferred Stock Investing. The ten criteria identified the highest quality issues. I called this period "the crisis the keeps on giving." You can see a summary of how the selection criteria performed in the third paragraph on this page.

The COVID-19 panic has delivered the best prices for the highest quality preferred stocks that we have seen since the 2008 Global Credit Crisis. Of the 123 high-quality preferred stocks currently trading on U.S. stock exchanges, 98 are now trading for a market price below their $25 par value, selling for an average price of $23.52 per share (March 31).

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDS) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.


Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find the 98 highest quality preferred stocks available for less than $25. Of the twenty-five preferred stock characteristics that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


The above search finds a total of 98 high quality preferred stocks that are curently trading on U.S. stock exchanges for a market price below these security's $25 par value.

Figure 2 shows the top 10 results (out of the 98 high quality securities found) when this search is applied to our Preferred Stock List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, the trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.

There were a total of 910 preferred stocks and ETDS' trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 910, there are currently 123 high quality preferred stocks selling for an average price of $24.15.


And of these 123 high quality securities, 98 have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's, the top 10 of which are listed above.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have.

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New Preferred Stock IPO’s, March 2020


March delivered the best buying opportunity to preferred stock investors that we have seen since 2008. Where value investors (common stock) make their money from an increase in the market price of their shares (buy low, sell high), income investors (preferred stocks, bonds) make their money from the regular dividends that these securities pay. For income investors, accumulating dividend-paying shares for the best available price (and lowest risk) is the objective.

Preferred stock prices fell an average of $4.53 per share during March, delivering higher returns to today’s preferred stock buyers. The average share price of U.S.-traded preferred stocks is now $20.37 (March 31), well below these securities’ $25 par value, now delivering an average current yield of 9.1 percent to today's buyers.


March’s new issue

With rates jumping all over every day throughout March, underwriters have been unable to accurately set the dividend rate to be offered by a new preferred stock so issuers are holding off for now. Consequently, there was only one new preferred stock issued during March - FCNCP from First Citizens Bancshares (FCNCA).

Note that I am using IPO date here, rather than the date on which retail trading started. The IPO date is the date that the security’s underwriters purchased the new shares from the issuing company.

A special note regarding preferred stock trading symbols: Annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers and other online quoting services for preferred stock symbols is not standardized. For example, the Series K preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others but this same security is “PSA.PR.K” at E*Trade and “PSA.PK” at Seeking Alpha. For a cross-reference table of how preferred stock symbols are denoted by sixteen popular brokers and other online quoting services, see “Preferred Stock Trading Symbol Cross-Reference Table.”

There are currently 123 high quality preferred stocks selling for an average price of $24.15 (March 31), offering an average current yield of 5.8 percent. By high quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings and cumulative dividends.

There is now a total of 910 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

About the new issue

FCNCP (FCNCP) is a 12 million share traditional preferred stock offering non-cumulative 5.375 percent dividends and a Moody’s investment grade rating of Baa3.

The difference between ‘cumulative’ and ‘non-cumulative’ dividends deserves a bit of amplification during these volatile times. The prospectus of a preferred stock will generally state, right on page 1, if the dividends paid to shareholders are cumulative or non-cumulative. Cumulative dividends must be paid; that is, if the company misses a dividend payment to you, their obligation to pay you accumulates (they still owe you the money). Alternatively, with non-cumulative dividends the company has no such obligation; if they skip a dividend payment to you, you lose (such as the case with common stock dividends).

Occasionally, the prospectus of a preferred stock will use different, but critically important, terminology. Rather than use the term “cumulative,” the prospectus may state that dividends “…may be deferred” (paid later). Similarly, rather than use the term “non-cumulative,” the document may state that dividends “…may be suspended” (never paid). The difference between the word “deferred” and “suspended” can make a huge difference to preferred stock investors, especially during volatile times.

But keep in mind that the “non-cumulative” designation may or may not indicate additional risk. Preferred stocks issued by banks, such as FCNCP, provide an example. Prior to the Dodd-Frank Wall Street Reform Act being signed into law in July 2010, banks were allowed to issue cumulative preferred stock and count the value of these securities toward their regulatory reserve requirement (“Tier 1 Capital”). These are bank reserves that are intended to be used in the case of some type of emergency. But what good are reserves when someone else (namely shareholders of the bank’s cumulative preferred stock) has a claim to the bank’s cash? In order for a bank to count the value of their preferred stock toward their Tier 1 Capital reserves, those preferred stock shares must be non-cumulative and pretty much all bank-issued preferred stock since July 2010 have been.

That takes us back to FCNCP which pays non-cumulative dividends. FCNCP is First Citizens Bancshares’ first and only preferred stock. The bank is a very profitable $3.5 billion regional bank founded in 1898 operating through over 500 branches throughout the United States. It would be hard to argue that their non-cumulative preferred stock dividends represent a sign of increased risk. Rather, as with other banks, FCNCP offers non-cumulative dividends because the bank would be irresponsible to configure this new security any other way.

Sources: Preferred stock data - CDx3 Notification Service database,

Prospectus: FCNCP

Preferred Stock Tax treatment

The 2017 Tax Relief Act included a provision aimed at small businesses that also delivers an enormous benefit to those holding shares of preferred stocks issued by REITs (which is pretty much all of us). Most small businesses are incorporated as a Limited Liability Corporation (LLC). Under this structure, the company’s earnings are passed through to the owners who then pay the tax on their personal returns. The Act allows those receiving such income to deduct, right off the top, up to twenty percent of this “pass-through income.”

But remember that REITs do the same thing as LLC’s – at least 90 percent of a REIT’s earnings are passed to the REIT’s shareholders primarily in the form of preferred stock dividends; the shareholders then pay the tax on their personal returns. In other words, preferred stock dividends received from REITs qualify under the Act’s “pass-through income” provision and are therefore up to twenty percent deductible. Such income is reported to you on the 1099 for received from your broker as “Section 199A” income.

The tax treatment of the taxable income you receive from income securities can be a bit confusing, but it really boils down to one question – Has the company already paid tax on the cash that is being used to pay you or not? If not, the IRS is going to collect the full tax from you; if so, you still have to pay tax, but at the special 15 percent rate.

Unless specified otherwise, traditional preferred stock dividends, including those paid by partnerships as pass-through income or are otherwise paid out of pre-tax profits, are taxable as regular income; you pay the full tax since the company has not.

Companies incorporated as REITs are required to distribute at least 90 percent of their pre-tax profits to shareholders. Doing so in the form of non-voting preferred stock dividends is the most common method of complying and because these dividend payments are made from pre-tax dollars, taxable dividends received from REITs are taxed as regular income.

Interest that a company pays to those loaning the company money is a business expense to the company (tax deductible), so the company does not pay tax on the interest payments it makes to its lenders. Since Exchange-Traded Debt Securities are debt, ETDS shareholders are on the hook for the taxes. Income received from ETDS’ is taxed as regular income.

Lastly, if a company pays your preferred stock dividends out of its after-tax profits, the dividend income you receive is taxed at the special 15 percent tax rate. Such dividends are referred to as “Qualified Dividend Income” or QDI. QDI preferred stocks are often seen as favorable for holding in a non-retirement account due to the favorable 15 percent tax treatment (FCNCP).

In Context: The U.S. preferred stock marketplace

The following chart illustrates the average market price of U.S.-traded preferred stocks over the last twelve months.

Many things affect the market prices of these securities such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer, perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a “bang-for-your-buck” measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.

Moving down the risk scale, the next chart compares the average current yield realized by today’s preferred stock buyers when compared to the yield earned by those investing in the 10-year Treasury note or 2-year bank Certificates of Deposit.

U.S.-traded preferred stocks are currently returning an average current yield of 9.1 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 0.7 percent and that of the 2-year bank CD is at 1.8 percent.

For comparison, I have set the Yield column in the first table above to show the current yield of the new March preferred on March 31. It is into this marketplace that March’s new issue was introduced.










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Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with over 100 reviews posted at Amazon.

The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are currently facing.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













Recent Preferred Stock Articles by Doug K. Le Du


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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.