A Preference for High-Yield Preferreds

12/01/2008 11:00 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, associate editor of Personal Finance, recommends three high-yielding preferred stocks.

Never buy a preferred stock or bond of any company if you wouldn’t want to own its common stock. Basically, income and growth never exist without the other for very long.

And a sweet yield can bring a very sour consequence, particularly when market and economic conditions are as unsettled as they are now.

Like [our recommended] common stocks, our preferred shares have taken on a little water this year. Fortunately, also like the commoners, the underlying businesses backing their distributions are still solid as ever. The latest proof is solid third-quarter earnings and generally solid guidance for the rest of the year and beyond.

Some have wrongly assumed AES (NYSE: AES) would suffer the same meltdown in this crisis that it did earlier in the decade. But a 47% earnings gain and $642 million in free cash flow are a world away from that crack up.

Management has trimmed per share profit estimates for 2008 and 2009 to account for currency swings, but is maintaining cash flow and expects to fund all debt obligations through 2010 with it. That’s a lot of security for AES Preferred C (AES^C) and its generous dividend of nearly 10%. AES Preferred C is a Buy up to $50. (The preferred C class shares closed above $34 Friday, while the common stock closed below $8—Editor.)

Comcast Corp 7% Preferred B yields nearly 9% after extremely uncharacteristic volatility over the past two months. Yet Comcast’s (Nasdaq: CMCSA) third-quarter results were a study in stability, as it continued to sign on customers for its phone/entertainment/data bundles and generated nearly $1 billion in free cash flow. That’s the best possible backing for any fixed income security, and a great reason to buy Comcast Corp 7% Preferred B. (We could not find a price quote for the preferred shares, but Comcast’s common stock closed above $17 Friday—Editor.)

Mid-America Apartment Communities’ 8.3% Preferred H now yields more than 10%, as investors seem to have forgotten REITs’ countercyclical quality. A tight mortgage market and weak housing prices encourage people to rent rather than buy. Mid-America’s (NYSE: MAA) third- quarter funds from operations rose 5% from last year’s levels on a 6% pop in sales, as rents ticked up modestly, occupancy held firm at 95.4%, delinquencies fell, and debt coverages improved.

The upshot: plenty of backing for this underpriced preferred stock. Buy Mid-America Apartment Communities 8.3% Preferred H (MAA^H) up to 25. (The preferred shares closed just above $22 Friday, while the common closed above $37—Editor.)

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