Attractive Preferred Stocks for a Volatile Market

Several readers and podcast listeners have recently emailed in questions concerning preferred stocks. It seems that these inquiries were prompted because of the levels of low-yielding cash positions they are amassing within their portfolios. So, here are a few pointers.

Preferred stocks have long been thought of as a safe haven from many of the nasty downturns that occur from time to time within the equity markets. Now seems to be one of those times. During the first few trading days of 2008 the unusually high volatility is adding to an already tense situation on Wall Street. The dreaded “R” word has been appearing in conversations as we see additional data points that are moving us steadily towards a slowing economy.

The alternatives for investors are contracting, particularly when we see many positions hit hard without much logic or notice. A glance at the recent 52-week high/low list for January shows a disproportionate number of names making lows. Unless we see a significant change in the current mindset of investors OR some magic from the housing and credit markets, we should plan on seeing more of the same market conditions for the next few months.

So, what is an investor to do? Cash is definitely king right now and even though it seems a sacrilege to keep money out of what is usually considered productive investments, the daily whipsaw has the potential to make even the most seasoned investor take notice. Even with the ongoing credit concerns and financial stocks in sorry shape, there may be an opportunity in high-grade preferred stocks.

Investopedia has a good working definition for Preferred stocks:

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as “preferred shares”.

The one catch is that many of these stocks seem to come from the financial sector which has not been seeing any hope of moving past their current dilemma in any time soon. Even so, the names on the following list have good ratings and are showing a yields substantially above market. Now may be a time to continue buying some of these as an alternative to the money that will otherwise be temporarily sidelined.

Realize that the current yield will help top protect some downside movement thereby giving a slight cushion if there is a downward movement in share price. Also note that on average, preferred stocks have also seen greater than usual swings recently. Usually, we have seen a maximum of a 5% variation in share price, even in poor market conditions. Recently though, some of these have seen their price range increase to 10%.

Still, there is probably a place for these in longer-term portfolios that need diversification that includes fixed income.

Note: The criteria used in this filter: Current yield above 6.50%, an A+ or better rating and qualification for the 15% dividend tax rate.

Comments

[Guest32224:]

Good point, these yields are really getting attractive. But it looks like nearly every name is from the financial sector, which still appears to be in free-fall.


Also, don't some of these preferred issues carry provisions that can "defer" quarterly payments for a period of up to 60 months (5 years)? If you're looking for income, that would truly be bad news if the company decided they weren't going to pay you the dividend for up to 5 years.


And aren't some of these actually re-packaged long-term debt instruments with maturities 30, 40 and 50 years away?

2008 Jan 08 07:55 AM

[tartal:]

In the second table,the price is in 2007 or 2008 ?

2008 Jan 08 10:01 AM

[weiwentg:]

well, financial stocks might be in "free fall", but the preferred shares won't move as much.

otoh, BAC's common stock already yields 6.02% today, plus there's the potential for appreciation. if you have a long time horizon, why not buy the common?

2008 Jan 08 11:07 AM

[Analises_Dad:]

Some not on the list. EPEXP (Energy), FCX-M (Mining), HCP-F (Heath Care). I try to find underlying issues where the common pays a dividend, much less to cut the preferred if they also have to cut the dividend on the common.

Some of my other current preferred: SLM-A, TMA-F. Great source for research on these stocks at quantumonline.com

2008 Jan 08 04:44 PM

[Andrew Horo...:]

Tartal:

Yes, good catch on 2007/2008. It is 2008 that should be there. Still new to 2008 on check and obviously tables. I agree that the financials seem to rule this area and that is a concern. Yet what is very interesting is the fact that even though many of these have bounced around do the past few months, they have recently stabilized. In fact, even on the day of slaughter (aka 1/8/08) many of these were unaffected or went up.

Analises_Dad: Also, agree that quantumonline.com is great site for preferreds.

And to the points of Guest32224, yes, these are to be thought of as fixed income with the ability to trade in and out via the market. There may be some that have extraneous provisions, that is why you need to read the fine print with any fixed income and dividend paying investment.

2008 Jan 09 12:34 AM

[granger:]

yeah quantum online is awesome, picked up a bunch of INZ yesterday. I like the quality of ING, they are rock solid in my opinion

2008 Jan 09 06:54 PM

[Stanley Fri...:]

I hold many of the recommended issues and bought them when they first came out. Their are all down about 15-20% from their face value, so the good yield hasn't softened my paper losses, although my ML advisors believe a rebound is in the offing in 2008.

I wonder why Mike 'picked up a bunch of INZ' when it is callable ?

2008 Jan 10 02:34 PM

[Andrew Horo...:]

STAN!!!!!!!!!!!!

NO to new issues again my friend. Learned a hard lesson, which your name brand broker will never tell you. NO NO NO!

The rebound happened.. Try to buy discounts in the future....Not line the pockets of the broker...

2008 Jan 15 12:40 AM