By Roger Choudhury
In retirement, especially these days, investors face fewer palatable income options. With the Fed targeting 0%-0.25% for the federal funds rate, bonds and savings accounts offer very little income potential. High beta dividend stocks offer yield but risk of capital depreciation. For these reasons, I advise retirees to look toward preferred stocks.
Specifically, I like preferred stocks issued by large, stable domestic utilities. Even with an economy deep in a long term recessionary state, people still need electricity. This creates an environment for less "lumpy" revenues, which help utilities maintain strong cash flows and thus dividend payments.
In this article, I examine four utility preferreds that offer attractive yields (between 4.7% and 7%). Each of these utility companies has, in my opinion, strong business fundamentals that can ensure profitability and thus dividend payment into retirement. I present these four stocks specifically to give retiring investors, with varying risk tolerance, options for income. If you're looking to replace maturing bonds or high beta dividend stocks, I suggest you dig further into the following four companies. But please use my research as a starting point for your own due diligence, as always.
Baltimore Gas & Electric (CEG) (7.125% Cumulative)
Recent Price | $101.03 per share |
Callable? | Yes, at $102.14 per share, since Jul 2007 |
Preferred Stock IPO | Jul 1993 |
Dividends | $1.78125 per quarter All payments made since Q2 2006 Next dividend payment should be on Apr 2 Record date is in first week of Mar |
Current yield | 7.0% |
S&P Rating | BBB- |
52 week trading range | $100.75 - 110.00 |
2009 lows | ~$84 (from $101) |
Ticker symbol (Yahoo! / Google / Fidelity) | BGLEI |
The company is a subsidiary of Constellation Energy. The latter posted an EBIT of $459.9 million in the first nine months of 2011, after showing a loss of $1,913.8 million in the same period in 2010. Interest expense also dropped 16.7% to $203.5 million. In the company's recent 10-Q, the firm puts forth a "Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements" of 2.20 for Baltimore Gas & Electric. Taking into account all this information, I believe that there are sufficient funds available to continue to pay preferred dividends for at least the next couple of years. I recommend BGLEI to income investors who are looking to on a modest amount of risk. Now would be a good entry point because it trades near its 52-week low.
Central Hudson Gas & Electric (CHG) (4.35% Series)
Recent Price | $91.00 per share |
Callable? | Anytime at $102.00 per share Possible for 11.7% in capital appreciation |
Preferred Stock IPO | IPO before EDGAR system existence |
Dividends | $1.0875 per quarter All payments made since Q1 2002 Next dividend payment should be on Apr 2 Record date is in first week of Mar |
Current yield | 4.7% |
S&P Rating | A- |
52 week trading range | $76.50 - 91.00 |
2008 lows | ~$55 (from $82) |
Ticker symbol (Yahoo! / Google / Fidelity) | CHGEZ |
In the first nine months of 2011, EBIT declined by 3.9% to $45.511 million. Interest charges also rose by 29.8% to $27.640 million. To put these in perspective, preferred and common dividends came out to $727,000 and $25.021 million, respectively. Because the company wants to keep debt issuing costs as low as it can, it will opt to continue to make these dividend distributions to avoid credit rating downgrades.
These shares are at their 52 week highs, so a 7-10% pullback would be an ideal time to get in. I suggest CHGEZ for income investors, looking to replace maturing bonds.
Gulf Power (SO) (6.00% Non-cumulative)
Recent Price | $103.00 per share |
Callable? | Anytime at $100.00 per share |
Preferred Stock IPO | Nov 2005 |
Dividends | $1.50 per quarter All payments made since Q3 2006 Next dividend payment should be on Apr 2 Record date is on Mar 15 |
Current yield | 5.8% |
S&P Rating | BBB+ |
52 week trading range | $97.12 - 110.00 |
2008 lows | ~$74 (from $101) |
Ticker symbol (Yahoo! / Google / Fidelity) | GLFPN |
Gulf Power is a subsidiary of the Southern Company, which posted an EBIT of $3,487 million (+13.7%) in fiscal year 2011. Also, interest charges fell by 4.2% to $857 million. Compare these figures to the preferred dividends of only $65 million, and I am confident that the company will continue to pay out the dividends. View the earnings release here.
GLFPN was trading near $97 in late December, so I would wait for a pull back to those levels before buying. This is an investment grade instrument, so I recommend this for income investors looking to take on some risk. Be aware of how much in losses that you can handle in case the share price drops due to macroeconomic factors.
Wisconsin Power & Light (LNT) (4.76% Cumulative)
Recent Price | $98.50 per share |
Callable? | Anytime at $100.00 per share |
Preferred Stock IPO | IPO before EDGAR system existence |
Dividends | $1.19 per quarter All payments made since Q1 2002 Next dividend payment is on Mar 15 Record date is on Feb 29 |
Current yield | 4.8% |
S&P Rating | BBB |
52 week trading range | $88.00 - 100.50 |
2009 lows | ~$64 (from $130) |
Ticker symbol (Yahoo! / Google / Fidelity) | WISCN |
Wisconsin Power & Light is a subsidiary of Alliant Energy, which had an EBIT of $375.7 million (-17.1%) in 2011. However, interest expense went down by 2.8% to $158.4 million. Also, preferred dividends amount to $18.3 million. Per common share, dividends were $1.70 and net income was $2.74. Given these figures, the company is on good grounds to continue to make both common and preferred dividend payments for the near future. I suggest these preferred shares for fixed-income investors looking to take on more risk relative to their portfolio of bonds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
