In the quest for yield, many investors forget about preferred stock and similar income instruments and instead focus solely on common stock. I believe this is a mistake as the right preferred stock can provide a very safe, high yield with low volatility compared to common stock. In this vein, this article will take a look at a brand new preferred issue from banking giant JPMorgan (NYSE:JPM) to see if it could be a good fit for your income portfolio.
The newest preferred issue from JPM is the Series T (JPM-T, may differ depending on your broker) and we'll take a look at its specifics to better understand what is being offered. First, this is a traditional preferred stock issue. As such, it has no stated maturity date and no debt issue backing it. This means that, assuming JPM doesn't go out of business and doesn't call the issue, it will persist forever. And speaking of calling the issue, JPM has the right to call the Series T at any time after March 1, 2019. So at a minimum, you've got just over five years of dividends to accrue before this issue could be called. And with much older issues out there for JPM, I don't think it would be called at that point unless rates had fallen to unheard of levels; it is something to consider but I don' think it's much of a risk.
Unfortunately the Series T is non-cumulative and while this is common for bank preferred shares, it is no less regrettable. This means that if JPM were to miss dividend payments it is under no obligation to make them up. While I think missed dividends are as remote a possibility with JPM as one can get, it is something to be aware of as your dividends are not guaranteed in any way. In the event JPM does miss dividend payments you'd also see some rapid and violent capital losses as the shares would be sold off to account for the likelihood of further missed dividends. Again, I don't think this is a risk but it could happen and it is a risk you're taking by owning a preferred stock, JPM or otherwise.
One nice characteristic about this preferred is that it is eligible for the favorable 15% dividend tax treatment. This means that, if held in a taxable account, the Series T would provide a higher after-tax yield than a similar issue that isn't eligible for the preferential treatment. This is a huge positive for those looking to hold the Series T in an account for current income. Of course, if you hold the Series T in a retirement account, it doesn't matter. It's a nice perk to have, though.
In terms of the way the dividends are structured, the Series T is actually issued at $10,000 per share but JPM is offering depositary shares that were issued for $25. This means that the $1.675 in annual dividends, paid quarterly, are good for a coupon yield of 6.7%. This is a very strong yield and in particular, from an issuer with the size and strength of JPM. While you can certainly find higher yields, this is about as high as the quality and safety gets in my view.
The Series T represents an opportunity to get into a high quality preferred from perhaps the safest issuer in the banking world with the maximum amount of time before a potential call. In addition, the strong yield and liquidity of the issue, given that JPM preferred issues always trade in the tens of thousands of shares per day, mean that the Series T is a strong choice for those investors seeking safe income. In addition, the preferential dividend treatment is a very nice characteristic for those investors wanting to hold the Series T in a taxable account.