Tahoe Market Pulse: Preferred stocks are attractive, yet risky
Special to the Bonanza
My January 22 article, “A murky outlook for stocks,” concluded that higher yielding preferred stocks were especially attractive.
They still are, especially for those who don’t want to subject their portfolio to the volatility of the stock market. Today, that is most everybody.
A preferred stock is a “hybrid” security with characteristics of both stocks and bonds. For example, preferreds represent ownership in a company, like a stock, but usually pay regular fixed dividends, like bonds pay interest.
They are primarily income vehicles, so there will be little if any price appreciation. Here are some of my favorites:
Renaissance Re called half of its preferred ‘C’ issue and I’m sure they’d love to call the other half. With the threat of a call, it won’t fall below $25 by much, even if interest rates rise. Downside risk is very low and it yields 6.1 percent. This security just went ex-dividend on Wednesday.
Saul Centers Preferred ‘C’ has traded between $25.50 and $26.50 for much of the last several years. It’s in the lower half of that range now and yields 6.5 percent. It doesn’t trade much so it can be hard to purchase, but patient investors can enter big orders at attractive prices. I like this security below $26. It is callable in February 2018.
Partner Re is being taken over and its preferred stock shareholders will roll over their stakes into the new company. In the process its Preferred ‘D’ may not be callable for five years. It currently yields 6.2 percent and, like Renaissance Re, it pays qualified dividends.
Are you willing to take on more risk for a higher yield? New York Mortgage Trust Series ‘B’ yields 8.8 percent and isn’t callable until 2018.
The security is not rated, but the diversified mortgage REIT makes enough money to easily cover its dividend. Its three-year low is $20 and it is $22 now.
Like the Saul Centers preferred, it doesn’t pay qualified dividends so it’s best for tax-deferred accounts.
Most people don’t own preferred stocks because brokers don’t recommend them and individuals don’t understand them.
Yet, in today’s near-zero interest rate environment, they provide attractive income with expectable risks. They play an important role in my client portfolios.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.