The ABCs of Preferreds Plus 3 Top Buys for Income Investors

10/24/2019 5:00 am EST


Harry Domash

Publisher, DividendDetective and Winning Investing

Corporations issue preferred stocks to raise cash. Although you buy or sell them the same way you trade regular stocks, preferreds are more like bonds. You buy them for the steady dividends, which typically equate to 4% to 8% yields, explains Harry Domash, editor of Dividend Detective.

The term “preferred” means that a firm must pay the dividends due on its preferred shares before it pays any common stock dividends.  When a company issues a preferred stock, it sets the annual dividend and sells the shares at a preset price, typically $25.

The initial yield, called the “coupon rate,” is the annual dividend percentage of the issue price. For instance, the yield on shares paying $1.50/year on shares issued at $25 is 6.0%. Because preferreds trade like regular stocks, actual trading prices depend on supply and demand.

Given their high yields compared to what you can get from a money market account, $25 preferreds typically trade up to the $27 to $29 per share price range. 

The downside is that, in most cases, the issuer retains the option to call (buy back) the preferreds as soon as five years after the IPO. If that happens and you paid $28, you’d lose $3 per share. You can minimize such losses by paying no more than $26 per share and selling while they’re still selling at a high premium, say a year-or-so before the call date. 

Besides for paying too high a premium, the main risk of owning preferreds is if issuer runs out of cash to pay the specified dividends. You can avoid that event by sticking with preferreds issued by firms with strong balance sheets. Many firms issue more than one set of preferreds, for instance, Series A, Series B, etc.

Preferred tickers are not standardized and vary from broker to broker. However they usually start with the issuer's common stock symbol and end with the series designator.

We are adding three new $25 call price preferreds to the portfolio this month. All have not been credit-rated. As a reminder, issuing firms must pay to have their preferreds credit-rated. The fact that a preferred is not rated simply means that the issuer opted to not pay for a rating. 

AG Mortgage Investment Trust 8.0% Series C (MITT-C)

AG Mortgage Investment (MITT), a REIT, invests mostly in mortgage-backed securities insured by U.S. Government agencies.

These preferreds, which recently traded at $25.60, are cumulative, meaning that AG Mortgage remains on the hook for any missed dividends. The market yield is 7.8% and the yield-to-call is 7.4% (9/17/24 call date). 

Fortress Transportation & Infrastructure Investors 8.25% Series A (FTAI-A)

Fortress (FTAI) owns and operates transportation infrastructure and equipment assets. These preferreds, not cumulative, recently traded at $25.72. The market yield is 8.0% and the yield-to-call is 7.5% (9/15/24 call date) .  New Residential Investment 7.125%

New Residential Investment 7.125% Series B (NRZ-B)

New Residential Investment (NRZ), a REIT, mostly invests in residential mortgage-related assets. These preferreds, which are cumulative, recently traded at $25.30. The market yield is 7.0% and the yield-to-call is 6.8% (8/15/24 call date).

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