Preferred Stock Income “On Sale” Right Now

| May 5, 2022
preferred stock

Stock market disruptions create opportunities for investors who can differentiate between investments that are in trouble versus those that are not.

Lower prices provide the potential for great long-term returns, and with rising interest rates and stocks in correction territory, preferred stocks offer an excellent opportunity to lock in long-term high yields.

Here are a few good ones “on sale” right now…

Preferred shares blend debt and equity characteristics in a company’s capital stack. Preferred shareholders stand behind bondholders, but ahead of common stockholders, in the event of a company liquidation. (But let’s stay away from companies in danger of going bankrupt!)

Preferred shares get their name because they have the preference for dividend payments over common shares. Put another way, a company cannot pay a common stock dividend unless it also pays the dividends of the preferred shares. As long as the company continues to declare regular dividends, the preferred dividends are 100% secure.

While there are occasional variations, here are the most common preferred stock features:

  • Dividends are fixed, set at a percentage based on the preferred stock’s par value.
  • Most preferred stocks have a $25 par value.
  • Preferred stocks become, at some date, callable. If called in, investors receive the par value plus any accrued interest.
  • The issuer is not required to call in preferreds once they become callable. Preferred stock can stay out in the market indefinitely.
  • Preferred shares trade on the stock exchanges, and the market price may be above or below the par value.

As a result of these features, I view investing in preferreds as buying an income stream. You do not know when a particular preferred issue will be called in. I keep 10 to 12 preferred stocks on the recommendations list for my Dividend Hunter service. I look for yields above 7% from companies that I am confident will continue to pay their common share dividends.

Share prices are not much of a factor. High-yield preferreds typically trade close to par; however, most of the recommended preferreds in this current, volatile market have dropped below par. This “shares on sale opportunity” allows you to buy shares with a greater yield. Keep in mind that the goal is to buy that income stream with preferred stocks.

Here are three interesting preferreds off my list:

  • New Residential Investment Corp. 7.5% Preferred Series A (NRZ.PA) has, as listed, a 7.5% coupon rate. The shares currently trade at $23.41, giving an 8.0% current yield. The NRZ common dividend is stable and growing, so this 8% yield is very secure. On August 15, 2024, NRZ.PA converts to a floating rate of LIBOR plus 5.8%. The first call date is at the same time.
  • PennyMac Mortgage Investment Trust 6.75% Preferred Series C (PMT.PC) trades for $22.93, giving a current yield of 7.5%. These shares are PennyMac Mortgage’s most recent preferred issue and are not callable until August 24, 2026.
  • Qurate Retail, Inc. 8.0% Redeemable Preferred (QRTEP) has some different features. First, Qurate Retail (QRTEA) does not pay common share preferreds, so investors need to keep closer tabs on the quarterly results. Next, the preferred shares become callable on September 15, 2027 and must be redeemed no later than March 15, 2031. QRTEP has a $100 par value and currently trades for $81.29, giving a current yield of 9.85%.

Preferred shares are different and require a different analysis. If you do your homework, preferreds let you buy and lock in a great high-yield income stream.

This post originally appeared at Investors Alley.

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Category: Dividend Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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