New Preferred Stock
IPO’s, July 2020
five new preferred stocks are offering an average annual dividend
(coupon) of 7.2 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 7.2 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 6.9 percent (using July 31 prices).
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
underwriters purchased the new shares from the issuing company.
special note regarding preferred stock trading symbols:
Annoyingly, unlike common stock trading symbols, the format used by
and other online quoting services for preferred stock symbols is not
For example, the Series K preferred stock from Public Storage is
TDAmeritrade, Google Finance and several others but this same security
“PSA.PR.K” at E*Trade and “PSA.PK” at Seeking Alpha. For a
table of how preferred stock symbols are denoted by sixteen popular
other online quoting services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
are currently 125 high quality preferred stocks selling for an average
price of $26.28 (July 31), offering an average current yield of 5.3
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.
is now a total of 933 of these securities trading on U.S. stock
(including convertible preferred stocks).
About the new issues
preferred stocks come in two flavors – mandatory convertibles where the
issuing company determines when your preferred stock shares will
convert to the company’s common stock and optionally convertibles where
the power to convert, or not, is in the hands of shareholders.
IVNCP/IIVIP is a two million share, unrated, mandatory convertible
preferred stock issued by II-VI Incorporated on July 2 offering a 6.0
percent annual dividend. While it is identified as a mandatory
convertible, there is also a provision allowing shareholders to convert
their preferred stock shares into the company’s common shares, making
this security somewhat of a hybrid. The prospectus for this security
defines a Maximum Conversion Rate that limits the upside to
shareholders upon conversion (wouldn’t want anyone making too much
money), but also provides a Minimum Conversion Rate in the hopes of
making you feel better. Note that this security has a very unusual $200
liquidation preference, meaning that in the event of redemption
shareholders will receive $200 per share in cash in exchange for their
shares. This is a complex security; those considering investing should
read the prospectus very carefully. II-VI is a very interesting $4.6
billion company, developing a wide variety of laser devices. The
company was founded in 1971 and is headquartered in Saxonburg,
ARGO-A is a speculative grade (S&P BB-) traditional preferred
stock from Argo Group International Holdings, Ltd (ARGO) paying an
annual non-cumulative 7.0 percent dividend. This coupon resets every
five years, beginning September 15, 2025, based on the then-current
five-year U.S. treasury rate plus 6.712 percent. September 15, 2025 is
also the call date for this security, meaning that the company re-gains
the right to redeem your shares rather than pay a higher coupon at that
time. The company is using $125 million of the proceeds from this
security to repay debt maturing on November 2, 2021. Doing so converts
$125 million in debt costing the company about 2 percent in annual
interest into equity costing the company 7 percent in dividend expense.
ARGO is a $1 billion insurance company headquartered in Bermuda.
CSSEN is an unrated Exchange-Traded Debt Security from Chicken Soup
for the Soul Entertainment, Inc. (CSSE) offering 9.5 percent annual
interest. ETDS’ are also referred to as baby bonds and are recorded on
the company’s books as debt (rather than as equity, as in the case of
preferred stock). As bonds, ETDS’ are often seen as having lower risk
than the same company’s preferred stock shares. ETDS’ are very similar
to preferred stocks and are often listed on brokerage statements as
such. Unless the prospectus says otherwise, the interest paid by ETDS’
is cumulative, meaning that in the event the issuer skips a payment to
you they still owe you the money (their obligation to pay you
accumulates). CSSEN is the company’s second income security and its
first ETDS. While most ETDS’ have a five-year call period and a
maturity date decades into the future, CSSEN becomes callable on July
31, 2022 and matures on July 13, 2025. This security raises about $21
million, $14.4 million of which is being uses to pay down debt. Some or
all of the remaining cash may be used “…to pay certain obligations to
CPEH (an affiliate of Sony Pictures Television) and affiliates thereof
that may otherwise be payable in shares of our Series A Preferred
Stock.” CSSE is a $110 million video production company founded in 2014
and headquartered in Cos Cob, Connecticut.
is an unrated traditional preferred stock from NexPoint Real
Estate Finance, Inc. (NREF) offering 8.5 percent cumulative dividends.
NREF is a brand-new mortgage investment company founded in 2019 with
the intention of becoming a REIT shortly. The COVID pandemic has
injected quite a bit of uncertainty into the real estate mortgage
market, specifically with respect to the value of mortgage backed
security bundles. Several mortgage REITs faced margin calls earlier
this year as lenders began insisting on additional cash collateral.
Launching a new mortgage REIT in 2019, only to be welcomed by this
COVID mess, presents a host of challenges that NexPoint will now
attempt to navigate. NREF-A is the company’s first and only income
security. NREF is a $75 million company headquartered in Dallas, Texas.”
is a double-investment grade traditional preferred stock from Truist
Financial Corporation offering fixed 4.75 percent non-cumulative
dividends. This 37 million share security, raising $905 million, is the
highest rated income security among July’s offerings. Truist, formerly
known as BB&T Corporation, is a $50 billion regional bank operating
through about 1,900 financial centers in the Southeastern and
Mid-Atlantic United States making it the nation’s sixth largest bank.
Truist has five income securities currently trading, all nearly
identical preferred stocks. Two of Tuist’s previously introduced income
securities, TFC-F and TFC-G, are currently callable and both are 18
million share securities offering a 5.2 percent coupon. While it has
yet to be announced, with the new TSTFL/TFC-R being a 37 million share
security with a 4.75 percent coupon, it would not be surprising if the
bank uses the proceeds from the new TSTFL/TFC-R to redeem all
outstanding shares of TFC-F and TFC-G. This maneuver saves the bank
just over $4 million per year in dividend expense.
Preferred stock data - CDx3 Notification Service database,
IVNCP/IIVIP, ARGO-A, CSSEN, NREF-A, TSTFL/TFC-F
Preferred Stock Tax treatment
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.
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
paid tax on the cash that is being used to pay you or not? If not, the
going to collect the full tax from you; if so, you still have to pay
at the special 15 percent rate.
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 (no such securities were issued during July).
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 (NREF-A, once NexPoint's REIT application is approved).
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
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 (IVNCP/IIVIP, ARGO-A, TSTFL/TFC-R). See the Status column in the first table in
In Context: The U.S.
preferred stock marketplace
following chart illustrates the average
market price of U.S.-traded preferred stocks over the last twelve
things affect the market prices of these securities
such as the proximity to their call or maturity date, proximity to
ex-dividend date, industry and/or overall health of the issuer,
direction of interest rates, pending government regulatory or policy
cumulative versus non-cumulative dividends and tax treatment of
payments. So what we really need to look at is current yield, which
the average annual dividend yield per dollar invested (without
re-invested dividend return or any future capital gain or loss).
is a “bang-for-your-buck” measure of value that normalizes differences
coupon rate and price to give us a single, comparable metric.
down the risk scale, the next chart compares the
average current yield realized by today’s preferred stock buyers when
to the yield earned by those investing in 2-year bank Certificates of
Deposit or the 10-year Treasury note.
preferred stocks are currently returning an average current yield of
7.0 percent (blue line) while that of the 2-year bank CD is at 1.0
percent and the annual return being offered to income investors by the
10-year treasury is 0.6 percent.
comparison, I have set the Yield column in the first table above to
show the current yield of the new preferreds on July 31. It is
this marketplace that July’s new issues were introduced.