The Economics Of Preferred Investing Part I

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Includes: ARR, CHK, CMRE, CPE, CYS, GFN, GSL, GST, LGCY, NLY, NM, NYMT, PPHM, SSW
by: Norman Roberts

Summary

Preferred investing is not for everyone.

Preferred investing is useful for generating income and preserving wealth.

Preferred risk should be determined by one's financial circumstance.

Preferred investing is not for all investors; yet preferreds should occupy some space in most portfolios. The proportion of which should be determined by each investor's goals and the limits of his financial resources. This article is designed to explore those goals and conditions and how best to employ them according to each investor's circumstance.

Because I best understand my specific circumstance and goals, I decided it's the best place to begin. In short, I live well-within my means and have other sources of income beside what is provided by the market. This allows me to take risks I would not otherwise take if my circumstances were different; however, like most rational beings I don't like losing. Therefore, I play to win, not to survive or meet a monthly mortgage payment. Winning to me is ending up with a more valuable portfolio at the end of the year than I started with at its outset. In fact, I know exactly how much I profited from the first day that I re-entered the market in August of 2008, certainly not the best time to have returned.

I invest in the market as if I am a mortgage lender. I lend money to a company and expect to be repaid with interest or dividends. And I invest primarily to preserve my wealth. I'm not interested in making what might be termed, a killing. I enjoy the steady income that accrues in my account each month. The risk I take is that I tend to invest in the higher yielding preferreds offered by sectors of the market considered volatile and laden with risk.

Consequently, this articles is directed toward investors who share my fortunate circumstances. Investors, adequately resourced, enough so that they are able to withstand even the severest market corrections and need not rely on steady market income to support their basic lifestyles. They need not be sophisticated investors, nor necessarily able to accomplish a credible deep dive into the numbers of the companies they wish to invest in. Many might have allowed financial advisors or brokers to manage their portfolios, but for the most part, have become discouraged by the poor performance they have suffered over time.

To avoid conflict and the legion of naysayers materializing to contest this article and my preferred point of view, I agree that investors can prosper with commons, and under the right set of circumstances, do a whole lot better with them than they could with preferreds. However, this article is written for the preferred investor.

My first rule of preferred investing requires patience. Rather than chasing yield and rushing to populate your portfolio with a series of preferred purchases, I urge that you relax and thoroughly investigate each company concerning its long-term viability. The safest offer the least risk, consequently, the least reward. Conversely the riskiest companies usually offer the greatest reward. Financially secure investors, if inclined to, are able to populate their portfolios with a greater percentage of the latter than the former.

My portfolio consists primarily of a mix of preferred equities and municipal bond funds. Frankly, the bonds barely concern me, nor do I pay much attention to them, satisfied to let the tax-free income accrue in my account each month. Spoiled by the attractive yields I received when I purchased the majority of my bond funds, I've avoided additional purchases for the past several years because of the high prices and low yields offered. As always, it's the preferreds I primarily invest in and pay most attention to.

And as I have explained, I tend to invest in the preferreds of companies in sectors that entertain the greatest risk and offer high rewards, in this case, the highest yields. On occasion I also take a flyer on the preferreds of a company that has suspended its dividend and appears to be a step away from bankruptcy. I suggested one such investment in the preferreds of Navios Maritime Holdings (NYSE:NM) in one of my first articles on March, 2016. "Navios Maritime Holdings: One Of Many Preferred Dividend Opportunities."

However, this article is directed toward the financially secure investor seeking preferred investments offering higher yields in exchange for moderately increased risk. For you I suggest the following sectors:

  • Energy: Specifically Oil and Gas E&P's
  • Shipping: Dry bulk, container shipping, and tankers.
  • Pharmaceutical R&D's
  • Mortgage REITs
  • Rental and leasing services

Oil & Gas E&P companies whose preferreds you might consider are: Gastar (NYSEMKT:GST), Callon Petroleum (NYSE:CPE), Chesapeake Energy (NYSE:CHK), and Legacy Reserves (NASDAQ:LGCY).

Shipping: I like Global Ship Leasing (NYSE:GSL), Costamare (NYSE:CMRE), and Seaspan (NYSE:SSW). Although I'm heavily invested in Navios Maritime Holdings (NM) and it has done well recently, I don't believe it is still out of the woods.

Pharmaceutical R&D's: I like Pereginne Pharmaceutical (NASDAQ:PPHM) because of its biomanufacturing arm Avid Bioservices.

Mortgage REITs (mREITs) are plentiful. Some are: Armour Residential (NYSE:ARR), Annaly Capital (NYSE:NLY), CYS Investments (NYSE:CYS), and New York Mortgage Trust (NASDAQ:NYMT).

Rental & Leasing: I follow General Finance Corp. (NASDAQ:GFN).

Disclosure: I am/we are long GSL-B, NM-G, NM-H, GST-A, ARR-A, ARR-B, PPHMP. GFNCP. NYMTO, CMRE-C, CMRE-D, SSW-G.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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