Advertisement
stocks

My Preference for Preferred Stocks

Preferred stocks are having a great year. Here are six investments to buy into the category.

Preferred stocks may sound like humdrum investments, but the category’s performance has been anything but, with year-to-date total returns of about 7.5%. In March, 15 new offerings totaling nearly $3 billion appeared, four times the usual monthly quota. That’s good news for anyone looking for fully liquid investments that pay a significant yield premium over Treasuries, bank deposits and most dividend-paying common stocks. Preferred shares pay a fixed dividend that takes priority over common-stock payouts. Common stockholders can’t get a cent unless preferred investors are paid as promised, though bondholders get paid first.

Explanations for the burst of new preferreds include random timing; companies raising money for mergers and acquisitions; and issuers eager to pay off or refinance their bank and bond debt on easy terms. Businesses with good to middling credit ratings can lock up financing for 6% or so, possibly in perpetuity because a preferred stock normally lacks a specific maturity date, although the issuer can often redeem after five years. For savers, a coupon rate of roughly 6% is excellent now that interest rates aren’t rising and may indeed recede. For a CEO whose alternatives include issuing junk bonds, selling assets (creating a tax liability) or taking on variable-rate bank loans, preferreds are an affordable financing solution.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

In truth, preferred stocks have been a great deal for ages. It’s astonishing that they aren’t more widely promoted. Word is getting out, though: Exchange-traded fund iShares Preferred & Income Securities (symbol PFF, price $37, yield 5.3%) has amassed nearly $15 billion in assets, which is a lot relative to an asset class that claims just $250 billion. (Prices, yields and other data are through April 19 unless otherwise noted.)

Great returns every which way. Standard & Poor’s tracks preferreds in many ways, measuring the category broadly as well as sliced into fixed-rate, floating-rate, low-volatility, real estate investment trust preferreds and more. The 10-year annualized returns through early April are grand: 10.5% for U.S. investment-grade preferreds, for example, 11.4% for REIT preferreds and 12.4% for preferreds whose initial fixed rates eventually convert to floating rates. The outsize gains of 2009 inflate 10-year records. But if you start at 2010, you still have excellent returns with little volatility and few defaults or skipped dividends.

Advertisement - Article continues below

Astute fund managers have added huge value. Flaherty & Crumrine, a manager of closed-end preferred funds, is tops. The F&C Preferred Income Fund (PFD, $14) has a nine-year average annual return of 10.7% and a 10-year annualized gain of 16.9%. Sibling funds F&C Preferred Securities Income (FFC, $19) and F&C Preferred Income Opportunity (PFO, $11) have similar returns. Circling back to the latest offerings, notable debuts include Digital Realty Trust’s 5.85% Series K (DLR-K) and Brighthouse Financial’s 6.60% Series A (BHFAP). (It can be tricky to find prices and symbols for preferreds, but brokers, Morningstar.com and the Wall Street Journal are reliable.)

Preferred shares are issued with a fixed face value and, in theory, can be redeemed at that value—typically $25 a share. I think it’s okay to buy preferreds at prices up to $26 a share—about where the better new issues trade now—because a generous yield compensates for that possibility.

As for risks, the bears worry that short-term traders’ antics could cause a mini panic, or that stellar gains and rising demand will foster a pile of junky offerings and a burst of defaults and downgrades. I never say never, but I’ve heard those warnings for years about REITs, utilities, high-yield bonds and municipals, too, without any cataclysms. There are many protections for preferred shareholders. Don’t be too nervous to take advantage of a great opportunity.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
13 Dividend Stocks That Have Paid Investors for 100+ Years
stocks

13 Dividend Stocks That Have Paid Investors for 100+ Years

Here are 13 dividend stocks that each boast a rich history of uninterrupted payouts to shareholders that stretch back at least a century.
May 21, 2020
Stock Market Today: Stocks Step Back Amid Economic Gloom
Markets

Stock Market Today: Stocks Step Back Amid Economic Gloom

The market gave up its early momentum to finish lower after a disappointing business report and the ongoing impasse in D.C.
September 23, 2020