High-Yielding Preferred Stocks Start 2014 With A Bang

by: The Financial Lexicon

In the low-interest-rate environment of recent years, investors have had to exercise patience when waiting for attractive fixed-income opportunities to arise. I often write about specific opportunities worth exploring and attempt to provide a variety of fixed-income ideas so that all the various types of income-focused investors have some food for thought.

Last month, I was interviewed for Seeking Alpha's "Positioning for 2014" Series. The focus of the interview was fixed income, with an emphasis on bonds. One of the many questions I was asked had to do with broadly identifying where in the world of fixed income investors could find the best yields relative to the risk of acquiring those securities. Part of my response included the following:

So many preferred stocks and exchange-traded debt are currently trading at moderate-to-large discounts to their liquidation preference/call price/maturity price with yields in the 6% to 8% range. I think it is time to begin building an allocation to those securities.

Toward the end of last year, I was of the opinion that a significant amount of window dressing and tax-loss selling was negatively affecting the price of various fixed-income securities, with preferred stocks in particular being pressured. Given my outlook for at best moderate GDP growth and inflation that is nothing to worry about over the coming years (health care being the one exception), 6% to 8% yields from preferred stocks and exchange-traded debt make a lot of sense for an income-focused investor. I don't think investors should load up a portfolio with those securities. But a modest allocation is worth considering.

As I mentioned in the opening paragraph, exercising patience is a must when searching for attractive income opportunities in today's generally low-interest-rate environment. On the other hand, when those opportunities arise, investors should act quickly. As 2014 has already taught preferred stock investors, if you don't act quickly, the best opportunities can disappear.

Since bottoming on December 30, the iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) is up 3.22%. That's a nice gain for just two weeks of trading but certainly nothing to write home about. When looking at my favorite preferreds, equity-REIT preferreds, the returns are much more striking. Below is a table outlining the performance since their lows on either December 30 or December 31 of the seven equity REITs with risk-reward profiles I found compelling enough to buy in 2013.

Low From 12/30/13 or 12/31/13

Closing Price 1/14/2014

% Change

Vornado Realty Trust (NYSE:VNO) - Series L




Kimco Realty (NYSE:KIM) - Class K




Regency Centers (NYSE:REG) - Series 7 - G shares




Public Storage (NYSE:PSA) - Series W




Taubman Centers (NYSE:TCO) - Series K




Realty Income (NYSE:O) - Class F




Digital Realty Trust (NYSE:DLR) - Series G




To illustrate, in yield terms, just how large the moves have been in the aforementioned REIT preferreds, let me start with Vornado Realty Trust, a REIT with a portfolio of over 100 million square feet of commercial real estate. The move from $18.63 to $20.29 was the equivalent of a drop of 59.2 basis points in yield, from 7.246% to 6.654%. In comparison, the 30-year Treasury bond (NYSEARCA:TLT) is trading roughly 17 basis points lower than its high on December 31. Even the two worst performers of the group, Digital Realty's Series G preferred and Realty Income's Class F preferred have fallen 29.4 and 29.7 basis points respectively in just over two weeks.

Despite the recent steep drop in yields, the lowest yielder of the bunch still offers a respectable 6.529% (Public Storage - Series W preferred). If you find the credit risk appropriate, the preferreds mentioned above still provide real yields that many investors will find attractive. This is especially true for those who see, at worst, only moderate upside in benchmark yields over the coming years.

Investors wishing to conduct research on the companies mentioned in this article may be interested in the following two sources: (1) Some of the commentaries I have written on these companies can be found here, and (2) Brad Thomas, a Seeking Alpha contributor who regularly writes about REITs, may have detailed articles regarding the seven aforementioned companies. His articles can be found here.

Disclosure: I am long each of the seven individual preferred stocks mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.