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Investors thinking about putting new money to work in The Bank of New York Mellon (BK) should consider the following:

Depending on your investment objectives, it may make sense to put your money in BNY Mellon's Series C preferred stock rather than the common stock. By moving up the capital structure into the Baa1/BBB (Moody's/S&P) rated perpetual preferred, you will take in a significant amount of extra income compared to the common stock. Based on Friday's closing prices, BNY Mellon's common stock yields 1.967%, and its preferred stock yields 6.531% (both pay qualified dividends). As the table below illustrates, even if BNY Mellon consistently grows its common stock dividend at an annually compounded rate of 10% for the next two decades (probably not going to happen), the common stock would still not pay out as much income as the preferred would during the same time period.

Note: The annual income is based on a hypothetical $20,000 investment in the common stock and a $20,000 investment in the preferred stock. The yields on cost are rounded to the nearest thousandth of a percent. The annual income columns are exact.

 

 

Year

Common Stock Yield on Cost

Common Stock Annual Income

Preferred Stock Yield on Cost

Preferred Stock Annual Income

2013

1.967%

N/A

6.531%

N/A

2014

2.164%

$432.74

6.531%

$1,306.20

2015

2.380%

$476.01

6.531%

$1,306.20

2016

2.618%

$523.62

6.531%

$1,306.20

2017

2.880%

$575.98

6.531%

$1,306.20

2018

3.168%

$633.57

6.531%

$1,306.20

2019

3.485%

$696.93

6.531%

$1,306.20

2020

3.833%

$766.63

6.531%

$1,306.20

2021

4.216%

$843.29

6.531%

$1,306.20

2022

4.638%

$927.62

6.531%

$1,306.20

2023

5.102%

$1,020.38

6.531%

$1,306.20

2024

5.612%

$1,122.42

6.531%

$1,306.20

2025

6.173%

$1,234.66

6.531%

$1,306.20

2026

6.791%

$1,358.12

6.531%

$1,306.20

2027

7.470%

$1,493.94

6.531%

$1,306.20

2028

8.217%

$1,643.33

6.531%

$1,306.20

2029

9.038%

$1,807.66

6.531%

$1,306.20

2030

9.942%

$1,988.43

6.531%

$1,306.20

2031

10.936%

$2,187.27

6.531%

$1,306.20

2032

12.030%

$2,406.00

6.531%

$1,306.20

2033

13.233%

$2,646.60

6.531%

$1,306.20

  

$24,785.18

 

$26,124.00

It is not until 2034 that the common stock would surpass the preferred stock's total income paid to shareholders. Of course, a 13.233% yield on cost would imply the common stock also rose significantly during that time. If you are a buy-and-forget type of investor, however, who holds stocks for life, then the rising share price does you little good beyond signaling the company is possibly healthy enough to increase dividends. Therefore, while from a total return perspective BNY Mellon may outperform over the next twenty or more years, the fact that it probably won't from an income perspective is something certain investors may want to know (hence this article).

Furthermore, should the company grow its dividends at less than a 10% compounded annual rate, the future common stock yields on cost shown in the table above would drop. For example, should BNY Mellon grow the dividend at a 5% annually compounded rate, the yield on cost in 2033 would only be 5.219%. Under that scenario, the stock would need to nearly double from today's levels just to break even, on a total return basis, with the income paid by the preferred stock.

Additionally, yields on cost in the 4% to 6% range wouldn't necessarily imply the share price of the common stock has risen. Therefore, even in the event BNY Mellon manages to consistently grow its dividend at a 10% compounded annual rate, if your time frame is shorter than twenty years (say 10 years), it is entirely possible that the preferred stock ends up the better investment choice not only from an income perspective but also from a total return perspective.

There are, of course, risks for preferred stock investors. Preferred shares can be called away. BNY Mellon's Series C preferred is callable at any time within 90 days following a "Regulatory Capital Treatment Event" (see prospectus for definition) and is callable for any reason on or after September 20, 2017.

Investors who buy perpetual preferreds should also keep interest-rate risk in mind. I recently wrote an article, "Here's Why I Care Very Little About Interest-Rate Risk," which discussed why, as an individual bond investor, interest-rate risk does not concern me. As an individual preferred stock investor, however, I do pay more attention to interest-rate risk. At today's benchmark rate levels, I think one can purchase a perpetual preferred under the reasonable assumption that at some point in the future, benchmark rates will return to these levels or lower (probably during a future recession or a period of very slow economic growth). Where corporate spreads will be at that time is the great unknown. And that is a risk of owning perpetual preferreds. But if you are one of those buy-and-hold-forever investors simply looking to build reliable income streams, then interest-rate risk will likely not be as high a priority.

In terms of the non-cumulative nature of the BNY Mellon's preferred stock dividends, I am not overly concerned about the company withholding dividend payments for an extended period of time. BNY Mellon consistently paid a quarterly dividend throughout the recent financial crisis, a time during which financials were under severe stress. If the company could make it through that time period without suspending the dividend, I am comfortable taking the risk of receiving a dividend stream that is non-cumulative. Remember, if the preferred shareholders don't receive their cash dividends, common shareholders won't either.

Regarding reinvesting dividends: It is true that reinvested common stock dividends would increase the number of shares owned, thereby also increasing the amount of annual income. But remember that preferred stock investors can also reinvest dividends.

On a final note, before making any purchases prior to a resolution of the debt ceiling drama, you should carefully consider the effects that a failure to raise the debt ceiling would have on the financial markets. I think it would have severe effects on the financial markets, including financials (XLF). Under that scenario, I would expect preferred stocks, including BNY Mellon's Series C preferred, to also plunge in value.

Source: Increase Your Income With BNY Mellon's Preferred Stock

Additional disclosure: I am long BNY Mellon's Series C preferred.