Preferred Stock Buyers: Double Dividend Opportunity Approaches

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 |  Includes: HPT.PB, PSA.PE, PSA.PL, PSB.PM, PSB.PO, USB.PG, USB.PI
by: Doug K. Le Du

Big banks are replacing their trust preferred stocks (TRUPS) in response to new domestic and international regulations. And Real Estate Investment Trusts (REITs) are issuing new preferreds at today's lower rates and using the proceeds to call expensive, crisis-era issues that are just now starting to reach their five-year call dates. 2012 is already delivering a bumper crop of new preferred stock issues and calls.

In fact, seven very widely held preferred stocks have been called for February 2012. That means that many preferred stock investors are going to see their brokerage cash accounts swell throughout the month starting on Thursday, February 9.

For those looking to reinvest the proceeds, there are currently about 80 high quality[1] preferred stocks to pick from. But with 44 of these, there is a special opportunity available to preferred stock investors.

Using the simple technique that I am about to describe, those who choose carefully will be able to pocket a fifth dividend payment this year, getting paid twice for the same period of time. By using this technique to earn a fifth dividend payment on the same principal, your effective annual return receives a nice boost with no extra risk or effort on your part.

February 2012 Calls

The seven widely held preferred stocks that are being called over the next few weeks are PSA.PL and PSA.PE from Public Storage (NYSE:PSA), HPT.PB from Hospitality Properties (NYSE:HPT), PSB.PO and PSB.PM from PS Business Parks (NYSE:PSB) and USB.PG and USB.PI from US Bancorp (NYSE:USB). Their February call dates are indicated in this table[2].

Preferred stocks with February 2012 calls

Keep an eye on your brokerage cash account throughout February. If you own shares of any of these preferred stocks you are going to see a big chunk of cash show up on the indicated call date.

That cash will include $25.00 per share (the par value) plus a dividend payment for the (partial) final quarter up to the date of the call shown above. When preferred stocks are called, shareholders are paid a final dividend for every day up to the call date.

Now here's where this gets interesting for preferred stock investors.

Remember that with preferred stocks, whoever owns the shares when the market opens on the morning of the ex-dividend date is going to receive the upcoming dividend payment for the quarter just ended. It does not matter how many days before the ex-dividend date you purchase the shares. Even if you only own the shares for one day prior to the ex-dividend date, you will be paid the entire quarter's worth of dividend cash (90 days).

So a preferred stock with a March ex-dividend date is going to pay its shareholders a dividend for the first calendar quarter of 2012.

That means that by using the proceeds from a February call to purchase shares of a preferred stock that has a March ex-dividend date, preferred stock investors will be paid twice for the same period. A fifth dividend for 2012 on the same principal.

Preferred Stock Buyers: March Is A Target-Rich Month

What makes this maneuver particularly interesting now is that (A) an unusually large number of calls for very widely held preferred stocks have been announced for February 2012 and (B) March is the last month of a calendar quarter which 61% of preferred stocks trading on U.S. stock exchanges use for their dividend payment schedule.

Preferred stock investors who hold shares of the preferred stocks being called during February are going to become newly cash rich right when 44 high quality purchase candidates are about to reach their respective ex-dividend dates. Purchasing shares of any one of these 44 prior to their March ex-dividend date will deliver a second dividend to the shareholder.

Purchasing Above Par Provides More Choices

Normally, preferred stock investors should avoid purchasing shares for a price above the security's par value ($25 in most cases). Since the issuing company, in the event of a call, will pay you $25 per share, purchasing your shares for a price below $25 adds another layer of principal protection to your investment and positions you for a capital gain downstream.

But the circumstances created by the large number of February 2012 calls, just before the last month of a calendar quarter (March) when most high quality preferred stocks have ex-dividend dates, may present an exception to the "never buy above par" rule.

One could use some or the entire amount of the fifth dividend to pay for the risk of purchasing shares above par. Doing so will increase the number of purchase candidates available to you.

For example, of the 44 high quality preferred stocks with March 2012 ex-dividend dates, there are five that can be purchased today for less than $25 per share. If none of these five are of interest, the number of choices increases substantially just above par.

If I were willing to pay up to one quarter's worth of dividend (since I'm getting a double payment anyway) above par, I suddenly have an additional 17 to pick from. In the event of a call, my March 2012 double-dividend would offset any capital loss[3].

A call at any time is going to provide you with an opportunity to reinvest your proceeds. But a call that occurs in a month that precedes the end of a calendar quarter substantially increases your opportunities. By using a list of high quality preferred stocks that is sorted by their ex-dividend dates[4], preferred stock investors can easily receive a double dividend payment on the same principal with no additional risk or effort.

Footnotes:

[1] High quality preferred stocks are those that meet the ten risk-lowering selection criteria from chapter 7 of my book, Preferred Stock Investing. For example, high quality preferred stocks offer "cumulative" dividends (if the issuing company skips a dividend payment to you they still owe you the money; their obligation to you accumulates), are rated as investment grade and (C) are issued by a company that has a perfect track record of never having suspended a preferred stock dividend. For more about how to select, buy and sell the highest quality preferred stocks read my October 24, 2011 Seeking Alpha article titled "Preferred Stock Investing: A Simple Guide To 7% Yield."

[2] See Seeking Alpha's "Preferred Stock Trading Symbol Cross-Reference Table" to see how your online service denotes preferred stock trading symbols. February calls shown here are for high quality issues as defined in footnote #1 trading on U.S. stock exchanges. Source: preferred stock data is from the CDx3 Notification Service database, February 3, 2012. Disclaimer: The CDx3 Notification Service is my preferred stock email alert and research newsletter service.

[3] The number of high quality preferred stocks that pay March dividends and are trading below or above par is based on closing February 3, 2012 market prices. Source: preferred stock data is from the CDx3 Notification Service database, February 3, 2012.

[4] For a list of high quality preferred stocks that can be sorted by ex-dividend date see the CDx3 Notification Service. If you want to do the work yourself QuantumOnline (which relies on the honor system for your contribution) provides a link to MarketWatch.com for preferred stock ex-dividend dates. You may also have luck with a downloadable software program called PreferredSearch from Virtuali-Tea (do a Google search for current download mirrors).

Disclosure: I own PSA.PE, PSB.PM and HPT.PB mentioned in this article.