4 Financial Preferred Stocks For Steady Income

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 |  Includes: BAC, C, GS, MS
by: Investment Underground

By Roger Choudhury

In the wake of the financial crisis, investors fled banking stocks. In my opinion, much of the pain in this sector is behind us. That being said, I am still uncomfortable investing directly in financial common stocks. However, I believe there are great income opportunities for investors who understand the intricacies of preferred stocks.

I chose the following four preferred stocks to give investors, with varying risk tolerance, options. For example, I believe now is a good entry point for conservative investors to buy Goldman Sachs' 6.125% notes due to recent price action. While, at the same time, Bank of America, Morgan Stanley and Citigroup's preferred issues are better for investors with a higher risk tolerance. Each of these stocks offer investors high yields (between 6% and 7.7%) and have a made all payments since inception. Given the "too big to fail" backstop of the financial sector, I believe each of the following four stocks will continue to make payments for the foreseeable future. Please use my research as a starting point for your own due diligence.

Bank of America (NYSE:BAC) (7.25% Non-Cumulative Convertible)

Recent Price

$938.50 per share

Callable?

No, but convertible into 20 BAC shares, after Jan 29, 2013

Preferred Stock IPO

Jan 2008

Dividends

$18.125 per quarter

All payments made since inception

Next dividend payment should be on Apr 30

Record date is on Apr 2

Current yield

7.7%

S&P Rating

BB+

52 week trading range

$665.06 - 1060.00

2009 lows

~$285 (from $1150)

Ticker symbol (Yahoo! / Google / Fidelity)

BAC-PL / BAC-L / BAC/PL

Click to enlarge

In FY 2011, the loss before taxes fell to $230 million from $1,323 million, lending more confidence that dividends and interest payments are secure for several more years. The debt to equity ratio has also declined to 1.89 from 2-plus levels. These shares trade near their 52 week high. So, I would wait for a slide to $850, as it may ease back to early January levels to cool off of its overheated rise. Considering the BB+ rating, I suggest this for aggressive investors who want to stay away from equities seeking a fixed-income investment with decent yield.

Citigroup (NYSE:C) (6.50% Non-cumulative Convertible)

Recent Price

$48.60 per share

Callable?

Yes, at $50 per share, after Feb 14, 2015

Preferred Stock IPO

Jan 2008

Dividends

$0.8125 per quarter

All payments made since inception

Next dividend payment should be on May 15

Record date is in the first week of May

Current yield

6.6%

S&P Rating

BB+

52 week trading range

$39.00 - 49.77

2009 lows

~$9 (from $56)

Ticker symbol (Yahoo! / Google / Fidelity)

C-PI / C-I / C/PI

Click to enlarge

In 2011, EBIT rose by 13% to $14.899 billion. Also, interest expense fell by 3% to $24.234 billion. In comparison, preferred dividends totaled a mere $26 million. Thus, I believe that there is adequate cash flow to continue to disburse these dividends.

Because shares are trading near their 52-week highs, I would heed caution until it falls back into early January levels near $43. I suggest this series only for aggressive investors due to the tumble down to $9 and the BB+ rating.

Goldman Sachs (NYSE:GS) (6.125% Notes)

Recent Price

$25.10 per share

Callable?

Yes, at $25 per share, after Oct 31, 2015

Preferred Stock IPO

Oct 2010

Dividends

$0.3828125 per quarter

All payments made since inception

Next dividend payment should be on May 1

Record date is in the third week of May

Current yield

6.0%

S&P Rating

A-

52 week trading range

$22.00 - 25.47

Ticker symbol (Yahoo! / Google / Fidelity)

GSF

Click to enlarge

EBIT dropped by 52% to $6.169 billion in FY 2011 and interest expense surged by 17% to $7.982 billion, raising concerns. However, S&P still gives this an A- rating. The Basel 3 regulations will require further capital raises, but Goldman Sachs is a resilient firm. I recommend this for income investors who are seeking reliable income flows, but this does not qualify for the 15% rate. A good entry point would actually be now, based on the three-month trading history.

Morgan Stanley (NYSE:MS) (6.25% Capital Securities)

Recent Price

$24.37 per share

Callable?

Yes, at $25 per share, since Apr 2008

Preferred Stock IPO

Apr 2003

Dividends

$0.390625 per quarter

All payments made since inception

Next dividend payment is on Apr 2

Record date is on Mar 16

Current yield

6.3%

S&P Rating

BB+

52 week trading range

$18.10 - 24.40

2008 lows

~$7 (from $25)

Ticker symbol (Yahoo! / Google / Fidelity)

MWG

Click to enlarge

This is a trust preferred security, which gives investors combinations of the features of corporate bonds and preferred stocks. The dividends are tax-deductible for the issuer, unlike common and preferred stock dividends. The trust's assets are made up of 6.25% Junior Subordinated Deferrable Interest Debentures due April 1, 2033, which may be extended to April 1, 2052.

In 2011, EBIT fell short by 2% to 2010 levels, with the firm bringing in $4.645 billion. Interest expense rose by 8% to $6.907 billion. Taking into account that preferred dividends were $292 million, relatively speaking, the company has enough funds to continue to disburse these dividends for the near future.

I also do believe that these shares are somewhat overheated, nearing their 52 week high. In early January, it was trading at around $22, and that would be a good entry point. I recommend this instrument for investors going after a fixed-income instrument with a fair amount of yield. However, this does not qualify for the 15% tax rate.

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