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Summary

  • RSO's newest preferred has just hit the market.
  • The issue has a very strong yield for stable income.
  • Reduced volatility in comparison to the common stock make the preferred a great choice.

In the quest for yield, many investors turn to REITs for the high income and tax-advantaged status. One such REIT is Resource Capital (NYSE:RSO), a company that focuses on commercial mortgages, other forms of commercial debt and equity investments. The stock is pretty small at only $750 million but it pays a ~14% yield. As you'd expect, the stock is somewhat volatile and the dividend, as with any other common stock, has the possibility of being cut or suspended at some point. However, RSO is a seasoned issuer of preferred securities as a source of sticky funds it can then invest. RSO just went live with its latest preferred issue and it is the subject of this article.

The issue in question is RSO's Series C, which closed earlier this month, and is currently trading on the OTC market under ticker RCSCP. The issue is a cumulative one, meaning that even if RSO were to run into financial issues, it is obligated to make up dividend payments on its preferreds, including the Series C. Common dividends, of course, carry no such guarantee and in addition to being cumulative, the dividend for the Series C can never be cut. Of course, there is no dividend upside potential in preferreds as there is with common shares, but the tradeoff is in additional safety stability.

The preferred, which has an issue price of $25 per share, sports an annual dividend of $2.16 paid in quarterly installments. At the issue price, the dividend is good for an 8.625% yield. However, shares have traded down slightly since being issued and are currently being exchanged for $24.55, bumping the current yield higher than the already-impressive 8.625%. This is a very strong yield from a preferred or debt security and if you're looking for steady income, RSO's Series C may be an option for you. The yield is lower than the common stock but you know that, barring bankruptcy, the preferred's dividend will be paid as it is cumulative; the common carries no such clause.

As the Series C is a true preferred it has no maturity date. However, it does have a date after which RSO can call the issue. That date is July 30, 2024 and at that time, RSO can redeem the Series C without notice for the full $25 issue price. The only way this would be a negative event for shareholders is if they bought above the issue price but as a general rule, you shouldn't do that anyway. Therefore, if RSO does call the C at that time, you'd simply get all your money back plus a little extra.

Unfortunately, the Series C is not eligible for the preferential dividend tax treatment that many preferreds are. This is because it was issued by a REIT and as such, if you hold this preferred in a taxable account you'd do well to fully understand the tax consequences of the income you receive as, depending on your situation, the impact on your tax rate could be material. Of course, if you hold this in a retirement account, it doesn't matter in the slightest.

While the Series C mimics a form of debt security with its regular distributions, it isn't rated by Moody's, et al. However, we do know that RSO's ratio of earnings to fixed charges and preferred dividends was 2.26 in the first quarter of this year, indicating strong ability of the company to pay its obligations and drastically reducing default risk on this preferred. Nothing is guaranteed but RSO is in good enough shape financially that I'd have little worry about missed dividends. Of course, part of owning an income security is monitoring the issuer's financial status so you still need to do that with RSO.

RSO's newest preferred isn't for everyone; some may prefer the higher dividend of the common stock. However, for stability and safety along with reduced volatility in comparison to the common stock, I think the Series C is a decent choice. RSO is able to pay its obligations quite easily and as such, the ~8.7% yield represents a bargain. Just make sure you hold the RSO in the proper account type given your tax situation and you can sit back and watch the dividends roll in for years to come.

Source: A New REIT Issue Yielding 8.7% For Retirement

Additional disclosure: I may initiate a position in the Series C at any time.