A 6.9% Yield For Your Retirement Portfolio

May.16.14 | About: Apartment Investment (AIV)

Summary

AIV's newest preferred stock issue, the Series A, goes on sale today.

AIV is a stable, mid-cap REIT that is a safer play in the apartment REIT space than some of its competitors.

The coupon on the Series A is about double the common shares' dividend yield.

AIMCO (NYSE:AIV) is a REIT that owns and operates apartment complexes in the US. The company has 233 communities and as a result, is one of the country's largest apartment community operators. In this article, we'll take a quick look at the company's newest preferred stock offering, the Series A, which is due to go on sale today. We'll see if the Series A could be a good fit for your income portfolio.

To begin, we'll define what the Series A is in order to understand if it is right for our portfolios. The Series A is a cumulative traditional preferred stock. That means that the preferred stock has no stated maturity date, essentially making it into a perpetual income vehicle for investors, and it has cumulative distributions. The cumulative distributions are very nice as it means that even if AIV misses dividend payments, it is obligated to make them up. This provides a large amount of protection for Series A holders as non-cumulative preferred stocks can essentially have their dividends suspended indefinitely for no penalty to the issuer.

Issued at $25 per share, the Series A carries a 6.875% coupon, or $1.72 per share annually distributed in quarterly installments. This provides a very nice yield for income investors and given that it is from a relatively safe mid-cap REIT, I think the coupon is fair. While there are certainly higher yields in the preferred universe, this preferred just about doubles AIV common shares' distributions so if you want exposure to AIV but 3.4% isn't high enough for you, the Series A could be a good choice.

Unfortunately, as this preferred is issued by a REIT, it is not eligible for the preferential dividend tax treatment that some preferreds receive. This means that if you hold the Series A in a taxable account you will be subject to higher taxes than you otherwise would be if it were eligible for the favorable treatment. Of course, if you hold the Series A in a retirement account, it doesn't matter. You'll have to judge the importance of that for yourself.

AIV does have the option to call this preferred five years from now in May of 2019 at the full $25 liquidation preference. This means that if you by the Series A today for $25 and it gets called in five years for $25, you'll not only receive $8.59 in dividends over the five years, but you'll also get your entire principal back. I have no idea if AIV will want to call this issue in five years but even if it doesn't, you are being paid a very nice coupon in the mean time.

For the more enterprising income investors the Series A from AIV could be a good option. AIV has a very large, diverse portfolio of apartment complexes in the US and is on sound financial footing. AIV isn't going anywhere anytime soon and will have no problem affording the dividend payments on the Series A. in short, if you don't mind the inherent risk of owning a mid-cap preferred stock, the AIV Series A could be a terrific option for your retirement account.

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.