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Issue 155


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by Doug K. Le Du


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TODAY'S BEST BUYS: Highest Quality Preferreds For Lowest Price


There are currently 123 high quality preferred stocks selling for an average price of $26.59 per share (investment grade, cumulative dividends). And 14 of these high quality issues have a dividend rate (coupon) of at least 5.1 percent, are selling within one dollar of their $25 par value and are offering an average current yield of 5.3 percent.

Using the Preferred Stock Search Engine

In today's high-demand preferred stock marketplace, there are no high quality issues selling below their $25 par value, so finding the best-priced candidates requires the use of a robust preferred stock search engine.

The preferred stock search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDS) that are currently trading within one dollar of their $25 par value (below $26.00), 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.

I have also limited this search to securities with a dividend rate (coupon) of at least 5.1 percent.


Figure 1 shows the complete filter used to find the highest quality preferred stocks available that are currently trading within one dividend of their $25 par value ($26.00). Of the twenty-five preferred stock characteristics that can be set, the five arrows highlight the keys for this search. Setting the "Dividend rate at least" value to 5.1 percent and the "Today's price, at most" parameter to "$26.00" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading within one dividend of their $25 par value, this filter also limits the results 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.


Figure 2 shows the results when this search is applied to our Preferred Stock List
TM (PSL) 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? Sign on to the CDx3 Notification Service website and set our PSL filter parameters as shown above to see the current list.

There were a total of 918 preferred stocks and ETDS trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 918, these fourteen are the highest quality issues securities, with a coupon of at least 5.1 percent, that are available for the best price (within one dollar of par).


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New Preferred Stock IPO’s, January 2020


Given the lousy alternatives for income investors, demand for U.S.-traded preferred stocks remains very high, pushing up the prices of these securities, and issuers are taking full advantage. Upward pressure on prices pushes down the dividend rate (coupon) for new preferred stock issues, allowing issuers to use the proceeds from a new lower-payer to redeem the outstanding shares of an older, higher-payer. We saw several such maneuvers by issuers throughout January.

Specifically, the average market price of U.S.-traded preferred stocks increased by $0.26 per share during January. This price increase pushed down the average current yield to today’s buyers by 0.08 percent, now at 6.3 percent.


January’s new issues

January’s seven new preferred stocks are offering an average annual dividend (coupon) of 5.5 percent, an average current yield (which does not consider reinvested dividends or capital gain/loss) of 5.5 percent and an average Yield-To-Call (which does consider reinvested dividends and capital gain/loss) of 5.3 percent (using January 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 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 A preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others but this same security is “PSA.PR.A” at E*Trade and “PSA.PA” 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 $26.59 (January 31), offering an average current yield of 5.2 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 918 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

About the new issues

SOJD is a $1 billion Exchange-Traded Debt Security from Southern Company (SO). 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 debt, the obligation to pay the interest on these bonds is cumulative. 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. SOJD pays 4.95 percent annual interest, offering double-investment grade ratings (Baa3/BBB). About half of the proceeds from SOJD are being used by Southern Company to pay off short-term debt. SOJD is the company’s fourth ETDS issued within the last four years (SOJA, at 6.25 percent, becomes callable this coming October 15). SO is a $72 billion regulated electric utility operating primarily in the southern United States. The company was founded in 1945 and is headquartered in Atlanta, Georgia.

MET-F is a double-investment grade (Baa2/BBB) traditional preferred stock from MetLIfe (MET) paying non-cumulative 4.75 percent dividends. Non-cumulative, as opposed to cumulative, dividends mean that if the company misses a dividend payment to you, they have no obligation to pay you later (dividends paid by common stock, for example, are also non-cumulative). MET-F is a 40 million share issue with a $25 par value, raising $1 billion for MET. While MET-F is the company’s third preferred stock that is publicly traded, the company’s MET-C, with a 5.25 percent dividend, is privately placed and became callable last September. The prospectus for the new MET-F indicates that the company is likely to use the proceeds from the new MET-F, plus cash on hand, to redeem outstanding shares of MET-C. MetLife is a $47 billion life insurance company founded in 1868.

WFC-Z is a massive 70 million share, $1.75 billion traditional preferred stock from Wells Fargo and Company (WFC) offering 4.75 percent double-investment grade dividends. The share count is important here because WFC has four older preferred stock issues currently trading that have reached their call dates and pay a higher coupon than the new WFC-Z. As much as I’m sure WFC would like to call all four, the new WFC-Z, as large as it is, only raises enough cash to redeem the shares of three of these older issues (although they could redeem the fourth with cash on hand). The four redemption candidates are WFC-N, 5.200 percent 27m shares; WFC-O, 5.125 percent 24m shares; WFC-P, 5.250 percent 23m shares; and WFC-T, 6.0 percent 28m shares. If you own any of these four WFC preferred stocks, watch for a redemption notice from your broker.

TRTN-D is a traditional preferred stock from Triton International Limited (TRTN) offering 6.875 percent cumulative dividends. The issuance of TRTN-D continues the company’s year-long trend of introducing a new preferred stock every three months. The company now has four preferred stock trading, each issued about three months apart. In each case, the company has used the proceeds, for the most part, to pay down in indebtedness, converting about $475 million from debt into equity on the company’s balance sheet. Triton is the world’s largest lessor of intermodal containers used for shipping goods by rail, ship or truck. The company was formed in 2016 from the merger of Triton Container International Limited and TAL International Group. The resulting company, Triton International Limited, is a $2.8b company headquartered in Bermuda.

ARR-C is an unrated traditional preferred stock from ARMOUR Residential REIT (ARR) paying a 7.0 percent fixed, cumulative dividend. ARR is using the proceeds from ARR-C to redeem all outstanding shares of ARR-B, the company’s 7.875 percent preferred stock that became callable on February 12, 2018. This maneuver will save the company about $650,000 per year in dividend expense. ARR is a mortgage REIT. Mortgage REITs typically do better during periods of falling interest rates than during periods when rates are increasing. They make their money by raising capital, which costs them whatever the prevailing rate is at that time; then, they use that capital to purchase bundles of mortgages (residential mortgages, in this case). During periods of falling rates, the average mortgage rate being paid by fixed-rate mortgages remains the same, while the cost of raising capital is falling (hopefully below the average interest rate being paid by the mortgages in the bundle). Consequently, the balance sheet of mortgage REITs will typically show large amounts of debt, reflecting the capital that they need to raise to purchase mortgage bundles. While ARR’s financial statements are no exception (showing about $12 billion in debt for this company with a $1 billion market cap), the company is also reporting negative profitability and operating cash flow. And its common stock has lost about three quarters of its value since the company was formed in 2008.

CPONZ/COF-J is from big bank Capital One, offering 4.8 percent non-cumulative dividends rated as investment grade by Moody’s Investors Services (Baa3/BB). This is a 50 million share issue raising about $1.25 billion. COF-J is the company’s sixth preferred stock currently trading. The prospectus says that the company may use some of these proceeds to redeem outstanding preferred stock shares. The only currently redeemable preferred stock from COF is COF-P, originally issued in August of 2012 at 6.0 percent, 1.2 percent higher than the new COF-J. Research shows that if a company can save at least 0.375 percent by using the proceeds of a new preferred stock to redeem the shares of an older, higher payer, there is a 91 percent chance that they will do so (source: Preferred Stock Investing, 5th Edition, page 227). Holders of COF-P shares should be on the lookout for a redemption notice from their broker.

DIMEP/DCOMP is from small bank Dime Community Bancshares, Inc., offering 5.5 percent unrated, non-cumulative dividends. DCOMP is the company’s first, and only, preferred stock. Even though Dime has historically specialized in lending for New York City multifamily real estate, 31 percent of Dime’s current loan volume is to high net worth individuals. Seeking to diversity, the company embarked on an effort to expand its business lending and municipal lending businesses in 2017. With a relatively small footprint, the bank puts up impressive financial metrics, paying out an average of 1.49 percent on its deposits while posting an average 4.01 percent yield on total loans. Dime is a $6.9 billion (market cap) regional bank originally founded in 1864 as the Dime Savings Bank of Williamsburgh. The company is currently headquartered in Brooklyn with 28 branches providing banking services to the area.

Sources: Preferred stock data - CDx3 Notification Service database,


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 (no preferred stocks were issued by partnerships during January).

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 (ARR-C).

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 (SOJD).

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 (TRTN-D, WFC-Z, MET-F, CPONZ, COF-J, DIMEP/DCOMP).

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 6.3 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.6 percent (the Fed’s multi-month effort to inject cash now pushing treasury yields down) and that of the 2-year bank CD at 2.1 percent.

For comparison, I have set the Yield column in the first table above to show the current yield of the new January preferreds on January 31. It is into this marketplace that January’s new issues were 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).













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