Preferred Stock Dividend Yield Now Double That Of Same Company's Common Shares

Includes: GS, NNN, VNO
by: Doug K. Le Du

High quality preferred stocks are now offering double the dividend yield as shares of the same company's common stock.

Despite significant volatility along the way, looking at any S&P 500 chart for 2013 makes it pretty clear that common stock market prices have moved up sharply this year delivering gains to value investors.

Conversely, in response to rumors that the Fed may be about to start backing out of its Quantitative Easing bond-buying program soon, the market prices of preferred stock shares [1] offered by the same companies fell during June and again during early-August, pushing preferred stock dividend yields higher for income investors (see "Why Falling Prices Should Be Welcomed By Preferred Stock Investors").

Preferred Stock Yield: 7.10 Percent; Common 3.55 Percent

Today's preferred stock market is offering 46 high quality [2] call-protected preferred stocks issued by 26 different companies.

This chart compares the dividend yield of these preferred stocks with that of the same company's common stock [3]. Each diamond represents the current (August 22, 2013) average preferred stock and common stock dividend yield for a specific company.

Same Company Preerred vs Common Stock Yield

Notice how, in all cases, the preferred stock offers a substantially higher dividend yield than the same company's common stock [4].

The three yellow diamonds provide examples. Goldman Sachs (NYSE:GS) preferreds are offering an average current yield (6.51 percent) that is over five times the current yield provided by the company's common shares (a miserly 1.25 percent). REITs, with their ninety percent profit distribution requirement, are generally more generous. National Retail Properties (NYSE:NNN) preferred stock shares are offering 7.15 percent compared to the 5.2 percent offered by its common dividend. Vornado Realty's (NYSE:VNO) preferreds are providing a current yield (7.24 percent) that is over twice the company's common dividend yield (3.56 percent).

Fed Policy Rumors Deliver Dividend Gains to Income Investors

With common stock prices moving up this year and, thanks to rumors over Fed policy, preferred stock prices moving back down, the advantage that preferred stocks have over common stock for income investors has been significantly amplified.

A similar analysis last November found that high quality preferred stocks were offering 1.3 times the dividend yield of the same company's common stock. Then, in the midst of falling preferred stock prices during June of this year, that advantage had jumped to 1.6 times.

Preferreds OfferingDouble Common Yield

Looking at it today, preferred stock investors are now receiving a dividend yield that is double that being received by those investing in the same company's common stock shares.

2013 - Something for Everybody

2013 has been an interesting period where economic reports and rumors of Fed action have caused the market prices of common stock and preferred stock shares offered by the same company to move in opposite directions. This somewhat odd price behavior has lowered the dividend yields of common shares while pushing up those of the same company's preferred stock.

Increasing common stock prices provide gains to value investors (buy low, sell high) while decreasing preferred stock prices boost the dividend earnings of income investors. From that perspective, 2013 is likely to be recorded as a year with something for both types of investors.


[1] Source for all preferred stock data in this article: CDx3 Notification Service database and Preferred Stock Investing, Fifth Edition ( 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 the first chart this article.

[2] "High quality" includes preferred stocks and exchange-traded debt securities that meet the ten criteria from chapter 7 of my book, Preferred Stock Investing. For example, high quality preferred stocks (1) offer "cumulative" dividends (if the issuing company skips a dividend payment to you they still owe you the money; their obligation to you accumulates), (2) are rated as investment grade and (3) are issued by a company that has a perfect track record of never having suspended a preferred stock dividend.

[3] Source for common stock yield:

[4] The yield values seen here use the same current yield formula that you see in your brokerage account or other websites that show yield for dividend-paying securities. Current yield does not consider the potential for a future capital gain or loss but, rather, is intended to be used for comparison purposes here. For more on the strengths and weaknesses associated with the various methods for calculating the return from a preferred stock investment see "Preferred Stock Investors: What Is Your Rate Of Return?"

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 (other than from Seeking Alpha). 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.