Preferred Play on US Cellular

03/25/2015 8:00 am EST

Focus: STOCKS

Harry Domash

Publisher, DividendDetective and Winning Investing

If you’re not familiar with preferred stocks, here are some things that you need to know. Although traded like common stocks, preferreds are more like bonds in that they represent debt, not ownership, explains Harry Domash, editor Dividend Detective.

Consequently, you buy them for the steady income, not capital gains. We recently added United States Cellular 7.25% Senior Notes (UZB) to our Preferred Stocks portfolio.

Majority owned by Telephone & Data Systems (TDS), US Cellular is the fifth largest US cellular company, providing service to more than four million customers in 23 states.

Most preferreds, including US Cellular’s Senior Notes, are issued at $25.00. Preferreds issued at that price typically trade in the $24 to $28 range depending on market conditions and how the market views the issuing companies ability to maintain the required dividends. Issued on December 1, 2014, the US Cellular preferreds recently traded at $25.32.

As is the case for most preferreds, the US Cellular preferreds are callable, meaning that the issuer has the right to call (redeem) them at the call price, which is $25.00, the same as the original issue price.

The US Cellular preferreds are callable on December 8, 2019. US Cellular doesn’t have to call its preferreds on that date. In fact, many preferreds are not called for years after their call dates.

That said, be careful not to overpay for preferreds. When your preferreds are called, you would lose any premium that you paid over the call price.

In the case of US Cellular, the current $0.32 per share premium would only reduce your yield to call (average annual return) to a still attractive 7.1%.

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