Preferred Stocks Have A Place In My Portfolio, Do They Have A Place In Yours?

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Includes: DFP, JPC, PFF
by: Redundant Tom

Summary

Preferred Stocks represent approximately 20% of the value of my portfolio, but approximately 40% of the dividends.

The preferred stocks listed in my portfolio have appreciated by approximately 2%.

Closed Ends Funds (CEFs) are better performers than ETFs.

Rising interest rates are a concern, but there are ways to account for that.

There have been various articles on SA discussing preferred stocks (PFDs), but I haven't seen many that have provided a completed portfolio and associated discussion. Most of my investing up until 3 years ago had been in growth stocks with some dividend stocks. Three years ago, I moved from a full time job to a part time job, and decided to move from growth to dividend stocks. I started reading about PFDs and thought they might be one way to accelerate dividend income. So I started building my PFD portfolio. Here is what it looks like now.

Symbol

Description

#

Init.

Current

Cost

Current

PFD

Cost

Div

--

Price

Price

Basis

Basis

%

%

BANC+E

BANC CALIF INC 7% PFD

200

$24.89

$25.17

$4,979

$5,034

7.00%

7.03%

$350

COF+D

CAPITAL ONE FI 6.7% PFD

400

$25.31

$26.87

$10,125

$10,748

6.70%

6.62%

$670

CHSCM

CHS INC. 6.75% PFD

1,200

$25.20

$26.15

$30,235

$31,380

6.75%

6.70%

$2,025

DLR+F

DIGITAL REAL 6.625% PFD

400

$24.84

$26.18

$9,937

$10,472

6.63%

6.67%

$663

DLR+I

DIGITAL REALT 6.35% PFD

400

$24.72

$25.43

$9,889

$10,172

6.35%

6.42%

$635

DLNG+A

DYNAGAS L N G PA 9% PFD

200

$24.54

$18.93

$4,909

$3,785

9.00%

9.17%

$450

KMI+A

KINDER MORGAN 9.75% PFD

200

$47.54

$45.77

$9,509

$9,153

9.75%

10.25%

$975

PSA+Y

PUBLIC STORA 6.375% PFD

400

$25.04

$27.36

$10,017

$10,944

6.38%

6.36%

$638

SSW+E

SEASPAN CORP 8.25% PFD

600

$25.20

$22.85

$15,118

$13,710

8.25%

8.19%

$1,238

SSW+C

SEASPAN CORP 9.5% PFD

400

$23.92

$25.37

$9,569

$10,148

9.50%

9.93%

$950

SSW+D

SEASPAN CORP 7.95% PFD

600

$23.93

$24.16

$14,361

$14,496

7.95%

8.30%

$1,193

NGLS+A

TARGA RESOURCES 9% PFD

400

$24.87

$23.25

$9,949

$9,300

9.00%

9.05%

$900

TNP+D

TSAKOS ENERGY 8.75% PFD

200

$24.83

$22.14

$4,967

$4,429

8.75%

8.81%

$438

FRC+A

FIRST REPUBLIC 6.7% PFD

407

$25.03

$26.17

$10,179

$10,641

6.70%

6.69%

$681

PEB+C

PEBBLEBROOK HOT 6.5%

400

$24.52

$26.30

$9,809

$10,520

6.50%

6.63%

$650

O+F

REALTY INCM 6.625% PFD

400

$24.42

$26.15

$9,769

$10,460

6.63%

6.78%

$663

HCN+J

WELLTOWER INC 6.5% PFD

400

$24.29

$26.37

$9,718

$10,548

6.50%

6.69%

$650

SCHW+B

CHARLES SCHWAB C 6% PFD

800

$23.82

$26.00

$19,058

$20,800

6.00%

6.30%

$1,200

TOO+A

TEEKAY OFFSHO 7.25% PFD

200

$23.03

$16.17

$4,606

$3,234

7.50%

8.14%

$375

VLY+A

VALLEY NATION 6.25% PFD

400

$24.97

$27.05

$9,989

$10,820

6.25%

6.26%

$625

WFC+T

WELLS FARGO & CO 6% PFD

400

$24.86

$26.15

$9,944

$10,460

6.00%

6.03%

$600

DFP

FLAHERTY CRUMRINE CEF

600

$23.29

$23.27

$13,974

$13,962

8.25%

$1,152

JPC

NUVEEN PFD INCOME CEF

1,000

$9.13

$9.44

$9,129

$9,440

8.90%

$840

PFF

ISHARES U.S. PFD ETF

250

$39.71

$38.66

$9,928

$9,665

5.59%

$540

Total

$259,666

$264,320

7.35%

$19,098

Click to enlarge

This portfolio consists of 21 individual preferred stocks, two CEFs and one ETF. The stocks are identified by the ticker symbol and the preferred series. CHSCM is unique in that CHS, Inc. has no common stock, just preferred stock. The number of shares, purchase price, and current price (as of 3/20/16) are then shown. This is followed by the total cost at the time of purchase and current value. The coupon dividend rate is then shown and then the dividend rate adjusted for actual purchase price. Finally, the annual dividend is shown. Totals are provided that show the total cost and current value and the weighted dividend rate as a function of the initial purchase price as well as total annual dividends.

So these dividends represent about 20% of my total dividends while the dividend stocks represent about 40% of my total portfolio. The reasons for this disparity include:

  • I came a little late to the dividend investing table.
  • I maintain a relatively high amount of cash.

Right now, my target is 20% PFDs in my portfolio, but it might creep up as I need more income and want to spend less time managing my portfolio.

There is a slight appreciation (2%) relative to the PFDs that I retain. I have sold a few at a loss, so I'm probably at a break-even point, but certainly, there is no significant loss relative to my initial investment. I can't say the same about my quality energy stocks.

I have also invested in both ETFs and CEFs that primarily hold PFD stocks. The CEF funds do much better that the ETFs that just track an index and my individual selection are also better than the one ETF that I have retained. I don't particularly care for the stocks in this ETF and will probably sell it and buy back into a CEF.

And yes, rising interest rates are a concern for PFDs, but I don't see a rapid increase in interest rates. The world's economy is just too fragile for that. Rates will increase, but they will increase gradually.

So what I have learned over the last 3+ years regarding PFD investing is:

  • Sell lower interest rate PFDs and replace them with higher rate PFDs. 3 years ago, I had a floor of 6.0% for new purchases, now it is 6.25%, and I have sold off all PFDs with a rate of less than 6%.
  • Rarely pay more than the initial coupon price (usually $25) and buy on the grey market when an issue initially comes out or buy when a stock goes ex-div and the price drops.
  • Other than bank PFDs only buy cumulative issues.
  • Maintain diversification across and within sectors. This can be hard as so many PFDs are associated with banks, but then I don't hold any common bank stock.
  • Set a ceiling for the maximum number of any PFD owned (mine is 1000).
  • CEFs and individual selections outperform ETFs.
  • Understand the underlying company, its dividend paying history, and the ratio of common to preferred stock.
  • When going into a more speculative issue, take baby steps and add to or sell as the situation warrants.
  • Pricing of individual PFDs including different series by the same company doesn't always make sense; there are bargains to be had.
  • There can be interesting opportunities near the call date where a PFD can be purchased for less than the call price plus accrued interest. Doesn't make sense to me, but it happens.
  • Pay attention to others on SA that follow PFDs; they are a lot smarter than me.

Disclosure: I am/we are long ALL STOCKS LISTED IN THE ARTICLE, BUT MAY SELL PFF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.