5 New Preferred Stocks Clear 7%, First Time Since July 2012

by: Doug K. Le Du

The average dividend rate being offered by the new preferred stocks issued during June was 7.05 percent, the first time that new issues have cleared the 7 percent mark since July 2012.

Reaching the 7 percent level implies a certain amount of normalcy or equilibrium within the marketplace for these securities. 7 percent is the long-term average dividend rate (coupon) offered by preferred stocks so, after two years of looking at lower returns, this is an important milestone for income investors [1].

The 7.05 percent average dividend rate for June's new issues also marks the third straight month that preferred stock investors have been treated to an increase in the dividend income provided by these securities.

June Offers 7.05% Average Dividend

Interestingly, only five new preferreds were issued throughout last month, presumably because issuers are waiting to see if prices tick back up after the June sell off (see related article and charts). In the event that prices do so, yields will edge back down, hence reducing the dividend rate that issuers will have to offer with a new introduction.

Issues and Issuers

The five new June issues include four traditional preferred stocks and one exchange-traded debt security (ETDs). ETDs are very similar to (and are often mistaken for) preferred stocks but are actually individual bonds that trade on the stock exchange. As bonds, ETDs are often seen as lower risk than the same company's preferred stocks (read more about ETDs).

5 New Preferred Stocks, June 2013

The new June issues have come from a surprisingly diverse group of companies. AFSI-A is from AmTrust Financial Services (NASDAQ:AFSI) while ALL-A is from Allstate (NYSE:ALL), both of which are insurance companies. BANCP is offered by First Pac Trust Bancorp (NYSE:BANC), a bank holding company that operates primarily in the western United States.

SB-B is issued by Safe Bulkers, Inc. (NYSE:SB). Safe Bulkers is a maritime shipping company specializing in the global transportation of dry goods. A relative newcomer to the preferred stock scene, SB-B is the company's only currently trading preferred stock. AIY, the only ETDs issued during June, comes from Apollo Investment Corp. (NASDAQ:AINV), a New York based Business Development Company. AIY is the second ETDs recently issued by Apollo, the first being AIB last October at 6.625%.

Oddly, there were no new preferred stocks issued by Real Estate Investment Trusts (REITs) during June. Since the 2010 Wall Street Reform Act had the effect of converting bank-issued cumulative Trust Preferred Stocks (TRUPS) into non-cumulative traditional preferred stocks (increasing investor risk accordingly), REIT-issued preferreds have dominated the high quality preferred stock market. But after introducing new preferreds at a breakneck pace this year, REITs took a breather in June.

60 High Quality Preferreds Now Available Below $25

For over two years now, the stimulus policies of the Federal Reserve have pushed prices up and yields down. With prices relatively high, income investors have been subjected to increased risk (having to pay more for their shares, often above par) for lower returns. And for savers, taxes and inflation have left little, if anything, of the returns offered by investment grade corporate bonds (now at 4.25%) or bank CDs (1.1%) [2].

The preferred stock market has taken a step toward normal as prices returned to pre-stimulus levels during June and the long-term 7 percent average dividend rate re-emerged. At the close on June 27, there were 60 high quality preferred stocks available for a market price below these security's $25 par value (up from just nine such issues at the end of May [3]).

While the Fed has made it very clear that investors should not expect a policy change any time soon, June 2013 offered us a reminder of what a Fed-free preferred stock marketplace looks like -- higher dividend income available for lower market prices.


[1] Source for all preferred stock data in this article: CDx3 Notification Service database (PreferredStockInvesting.com). Disclosure: The CDx3 Notification Service is my preferred stock email alert and research newsletter service and includes the database of all preferred stocks and exchange-traded debt securities traded on U.S. stock exchanges used for this article.

[2] Source for average June 2013 investment grade corporate bond yield: U.S. Federal Reserve (federalreserve.gov). Average bank CD yield is average APY for the top ten 24-month certificates offered by U.S. banks at the end of June 2013 (source: bankrate.com).

[3] Source for the nine sub-$25 high quality preferred stocks from May 29: CDx3 Research Notes, June 2013, page 3. Source for current 60 sub-$25 high quality preferred stocks: the "CDx3 Bargain Table" HotList, CDx3 Notification Service website (subscription required).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Securities identified within this article are for illustration purposes only and are not to be taken as recommendations.