5 Preferred Stocks That Adjust to Higher Interest Rates

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 |  Includes: AEG, BAC, GS, HSBC, MET
by: Roger Choudhury

Economic data has been negative as of late. US GDP for Q1 was only 1.8%. The Chicago Fed’s National Activity Index (.pdf) fell -0.45 in April after rising +0.32 in March. Moreover, the Philadelphia Fed’s Business Outlook dropped to 3.9 in May from 18.5 in April. The Richmond Fed also released its Manufacturing Index, which came in at -6. The consensus was +9. In April, it was +10.

It may be time to consider adding more fixed-income instruments to your portfolio. More particularly, I like preferred stocks because you can smooth out the bumps and erratic moves of the market through consistent dividend payments. Also, these debt instruments do not ebb and flow like common shares. To avoid credit rating downgrades, companies aim to make the dividend payments.

Below, I focus upon preferred stocks that pay out higher based on higher interest rates. I also take care to mention those at or below par value, which is the dollar amount that you get after the security reaches maturity. Generally speaking, you should avoid preferred stocks that trade above par value because you end up losing the gap between what you paid for and the call price. With the Fed targeting 0%-0.25% for the federal funds rate and slowing global economic growth, you ought to consider the following:

AEGON (NYSE:AEG) (Floating Rate Perpetual Capital Securities) became callable on December 15, 2010 at $25 per share, but it trades under $23 per share. When these shares are called, you can make up to 8.7% on capital appreciation. You get paid for your patience with a quarterly dividend payment, which is the greater of 4.00%, or the three-month LIBOR plus 0.875% with a par value of $25 per share. This series has a good track record since its inception in November 2005, and has made all payments.

The next dividend payment is on June 15 to holders of record at June 1. Additionally, S&P rated this security as BBB. The current yield is 4.5%, and the 52-week trading range is $14.74-$23.92. The 52-week high was reached on May 12, 2011. The Yahoo! Finance, Google Finance, and Fidelity ticker symbols are all AEB. I recommend this for risk-averse income investors.

Bank of America (NYSE:BAC) (Floating Rate Non-cumulative Series 1) became callable at $25 per share on November 29, 2009. Here’s a bonus: You can buy these shares at under $18 per share. When Bank of America decides to clean up its act, it may want to call these shares, and then you can make 40% in capital appreciation. Aside from that, the dividend payments are quarterly and amount to three-month US dollar LIBOR plus 0.75%, but will not be less than 3.00% per annum.

These shares were first traded on October 27, 2004, and have made all dividend payments since inception. The next dividend payment is on August 28. Keep in mind that S&P rated this security as BB+. The current yield is 4.2%, and the 52-week trading range is $15.22-$18.22. The 52-week high was reached on May 10, 2011. The Yahoo! Finance ticker symbol is BML-PG, the Google Finance ticker symbol is BML-G, and the Fidelity ticker symbol is BML/PG. I would suggest this for more aggressive income investors for their portfolios.

Goldman Sachs (NYSE:GS) (Floating Rate Non-cumulative Series C) became callable on October 31, 2010 at $25 per share, and trades right below $23 per share. You have the potential to make 8.7% in capital appreciation when this series is called, but while you wait, you collect dividend payments. With a par value of $25 per share, the floating rate will be equal to the greater of 0.75% above LIBOR or a minimum of 4.00%. Since their inception in October 2005, all quarterly dividend payments have been made.

The next dividend payment is on August 10. S&P rated this security as BBB-. The current yield is 4.3%, and the 52-week trading range is $19.60-$24.24. The Yahoo! Finance ticker symbol is GS-PC, the Google Finance ticker symbol is GS-C, and the Fidelity ticker symbol is GS/PC. I would recommend this for investors that are looking for a reliable and relatively safe income instrument.

HSBC USA (HBC) (Floating Rate Non-Cumulative Series G) became callable at $25 per share on January 1, 2011, but it trades right at $25 per share, so there is not much room for capital appreciation if these shares are called. However, this series pays out a decent quarterly dividend equal to the three-month LIBOR plus 0.75% of the stated value of $25 per depositary share, but will not be less than 4.00% per annum. These shares made their debut in October 2005 and have made all dividend payments since then.

The next dividend payment is on July 1 for investors of record at June 15. Also, S&P rated this security as A-. The current yield is 4.0%, and the 52-week trading range is $18.40-$25.00. The 52-week high was reached on May 10, 2011. The Yahoo! Finance ticker symbol is HBA-PG, the Google Finance ticker symbol is HBA-G, and the Fidelity ticker symbol is HBA/PG. This is the highest-rated security on this list, and I highly recommend it. Keep in mind that this security is medium risk and offers medium reward if you select this.

MetLife (NYSE:MET) (Floating Rate Non-Cumulative Series A) became callable at $25 per share on September 15, 2010, and it trades right below $25 per share. This does not offer a terrific capital appreciation opportunity, but you can own preferred stock from one of the largest insurance companies in the world. Not only that, you can collect dividend payments at the greater of 4.00% or 1.00% above the three-month LIBOR rate, given a par value of $25 per share. This series came out in June 2005, and has made all dividend payments since inception.

The next dividend payment is on June 15 for shareholders of record at May 31. Additionally, S&P rated this as BBB-. The current yield is 4.1%, and the 52-week trading range is tight: $21.72-$25.00. The 52-week high was reached on May 16. The Yahoo! Finance ticker symbol is MET-PA, the Google Finance ticker symbol is MET-A, and the Fidelity ticker symbol is MET/PA. This is another solid income opportunity, and income investor should take a serious look at it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.