Tahoe Market Pulse: Let’s talk more about preferred stocks
March 11, 2015
My January 29 article, "The Stocks That I Prefer," covered preferred stocks and why I like them. Since then, preferreds have ticked higher almost every day.
What does that mean and which ones do we like? Read on:
Preferred stocks are an attractive alternative to bonds. Most bonds pay little and are subject to interest rate risk. Preferred stocks, too, have interest rate risk, but to a lesser degree.
Recent price movement proves this. Interest rates have moved higher since January 30. As a result, Treasury bond funds are down 9 percent. Corporate bond funds are down, too. So are utility stocks. Preferred stocks are up, however.
The Fed may be closer to raising rates, but the preferred market isn't fearing sharply higher rates.
That's because Fed hikes affect short-term rates, and they will be very tepid even when they begin.
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Unfortunately, many preferreds are currently callable, and they trade above par. Exceptions are adjustable-rate preferreds. The January 29 article listed my favorite, but I also like Goldman Sachs Series 'D' and Morgan Stanley Series 'A.'
Both pay their minimums now ($1 annually), but will adjust higher when (not anytime soon) LIBOR moves sharply higher.
Are you willing to take on more risk for a higher yield? New York Mortgage Trust Series 'B' yields 7.75 percent and isn't callable until 2018.
The security is not rated, but the diversified mortgage REIT is doing well and makes enough money to easily cover its dividend. It doesn't pay qualified dividends so it's best for taxable 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.