Preferreds get their name from the fact that these types of shares have preference over common shares for dividend payments, notes Tim Plaehn, editor of The Dividend Hunter — and a participant in The Interactive MoneyShow Virtual Expo on February 16-18. Register for free here.
Put another way, a company cannot pay common stock dividends unless it first pays the preferred dividends. Preferreds pay a fixed dividend based on a coupon rate and a par value, which in most cases is $25.00. For example, a preferred stock with a 6% coupon rate will pay a $0.375 per share dividend every quarter.
I recommend investing in select preferred stocks with the goal of a safe, stable, high yield income. I want to add preferred shares at prices at or below par ($25) with a targeted 7% average yield.
Currently, I look for preferreds with several years before they are callable. Here are two new preferred stocks I am adding to the recommendations list:
Two Harbors Investment Corp. 7.625% Preferred B (TWO.PB)
The current yield is 8.0%, and the first call date is in July 2027. The ex-dividend date was January 11, so it will be another quarter before we earn the next dividend. Buying now takes advantage of the ex-dividend share price drop.
Avid Bioservices, Inc. 10.50% Convertible Preferred E (CDMOP)
MoneyShow’s Top 100 Stocks for 2021
The top performing newsletter advisors and analyst are back, and they just released their best stock ideas for 2021. Get your FREE copy of MoneyShow’s 2021 Top Picks report here and see why the nation's leading investment experts believe these stocks will significantly outperform the market in 2021.
Avid Bioservices (CDMO) is an independent biologics manufacturer. CDMO is profitable but does not pay common dividends. It is a high growth biotech stock.
The Avid Bioservices 10.50% Convertible Preferred E become callable in February 2021, but I think it is highly unlikely the company would use cash to buy in the preferred shares.
Currently, Avid is expanding rapidly, and available money will be used to fund the growth. CDMOP shares are convertible into 1.1905 shares of CDMO.
If the common shares manage to double in 2021 (they were up 90% in 2020), the conversion factor will push up the preferred stock price. This recommendation is to buy shares of CDMOP. At $27.50, the shares yield 9.5%.