Fixed Rate Preferred Stocks - Complete Review
- I review the most popular fixed-income securities, the fixed-rate preferred stocks.
- All the preferred stocks are sorted in categories.
- What has changed over the last month?
- Looking for more? I update all of my investing ideas and strategies to members of Trade With Beta. Start your free trial today »
In this article, I'll review the most popular fixed-income securities, the fixed-rate preferred stocks, sorted into several categories. There are 359 issues in our database that trade on primary exchanges, excluding the convertible preferred stocks, 60% of which are part of the biggest ETF for fixed-income securities: the iShares Preferred and Income Securities ETF (PFF). As we can see in the chart below, half of the PFF's market capitalization consists of fixed-rate preferred stocks, which also corresponds to almost half of the fund's holdings. This means that we are talking of around 7B in dollar value.
First, let's take a look at the main indicators that we follow and their behavior during the last month.
TNX - CBOE 10-Year Treasury Note Yield Index ($TNX)
iShares Preferred and Income Securities ETF (PFF)
SPDR S&P 500 ETF (SPY)
The most essential thing for fixed-income investors for the past month is that the TNX continues to be well below the 3% yield mark. Supported by the dovish-than-expected Federal Reserve's guidance on its tightening cycle, released by the Fed last week, followed by the dovish Fed Chair speech in the press conference, the Treasury yields remain low. The fixed-income securities have continued its Christmas rally also in the New Year, and as we can see in the second char, the main benchmark PFF is up 5% for January. As for the equity markets, that had entered into a bear market and the S&P 500 recorded its worst December since 1931, everything seems to be behind us. Furthermore, investors may be happy with the January rally and the 8% gain of the S&P 500 since the beginning of the year.
1. Redemption Risk by Years-to-Call and Yield-to-Call:
The lower the stock, the bigger the call risk. Be careful not to get surprised in these ones if you are tempted by the higher yield.
1.1 Long Time No Call
1.2 Short Time No Call
2. Stocks That Are Below Par (Stripped Price) and Have a Current Yield of Between 5% and 8%:
It should be noted that PG&E (PCG) suspended the dividend on its preferred stocks beginning Jan. 31, 2018. Yet, their dividends are cumulative, and the reason for their suspension at this time is not the solvency of the company. At the end of the day, a suspended dividend means that we are not getting our money on time, and the time value of money does matter to us. Furthermore, on Jan. 29, 2019, the company has filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California.
Take a look at the investment grade only:
Now, I will separate these into two groups - those that pay a qualified dividend rate and those that pay a not qualified dividend rate.
3. Current Yield < 5% (Try to Avoid These):
An interesting fact about the preferred stocks in this group is that they are issued in the 1940s and 1950s, which makes them older than many of us. In terms of taxation, they all pay a qualified dividend.
4. Current Yield Between 8% and 10%:
None of these preferred stocks bears an investment grade rating, although they have to bring extra risk because there is no free lunch. Furthermore, please note that Brookfield DTLA Fund Office Trust Investor 7.625% Series A Cumulative Redeemable Preferred Stock (DTLA.P) has not paid any distribution since November 1, 2008. Despite the fact that there is a solid amount of accumulated dividend, it is still suspended. Besides, as I mentioned above, PCG.PG also has its dividend suspended.
5. Current Yield > 10%:
For a better look at the rest of the preferred stocks in this group, let's remove RHE-A and HOVNP from the chart, as its current yield is above 75%.
Overall, this is a highly speculative group, and the preferred stocks involved here come from companies that are currently in serious problems. The curious thing, in this case, is that only 8 of the 26 preferreds have their distribution suspended. These are RHE-A, HOVNP, NM-H, NM-G, MHLD's preferred stocks (MH-A, MH-C, and MH-D) and CETXP.
6. Price > Par, Sorted by Yield-to-Worst and Years-to-Call:
Now, in the next few charts, I'll examine how the yield curve looks.
7. The Yield Curve for Rated Ones:
This is the hypothetical five-year yield curve of fixed rate preferred stocks. For a better view, I have excluded MAA-I and SPG-J.
8. The Yield Curve Investment Grade:
All preferred stocks, except for PSA-A and WFC-Y, are eligible for the preferential income tax rate of 15% to a maximum of 20%.
9. The Term Preferred Stocks:
By Years-to-Maturity and Yield-to-Maturity
By Years-to-Call and Yield-to-Call
Here is the full list:
10. Let's Try to Find a Qualified "Investment Grade" Rated Preferred Stock With a Current Yield > 5.8% and YTC > 5%:
Take a closer look at the main group:
The full list:
11. Ex-Dividend Dates for February 2019:
Which fixed rate preferred stocks are ex-dividend until the end of the month. The date given is predicted on the base of the previous ones and may vary by a few days.
The ex-dividend dates are very useful for every fixed-income investor who practices the dividend capture strategy.
12. mREIT Fixed Rate for IRA Accounts:
13. A Look at Recent Redemptions:
There are 2 preferred stocks that have been called for redemption for the past month:
Citigroup, Inc. 6.875% Depositary Shares Non-Cumulative Preferred Stock Series L (C-L)
JPMorgan Chase & Co 6.70% Depositary shares Non-Cumulative Preferred Stock, Series T (NYSE: JPM-B)
14. A Look at the Most Recent IPO:
Also, there is one new fixed-rate preferred stock, issued for the past month: JPMorgan Chase & Co 6.00% Depositary Shares Non-Cumulative Preferred Stock Series EE (NYSE: JPM-C)
15. Top Movers
Here is the general idea of how the fixed-rate preferred stocks moved over the last month. On the abscissa, the movement is given in absolute value.
As expected, almost all preferred stocks are positive for the past month.
- Top Gainers:
- Top Losers:
The AFSI preferred stocks (AFSI-A, AFSI-B, AFSI-C, AFSI-D, AFSI-E, and AFSI-F) have lost more than 1/3 of their market value, as the company announced that its Board of Directors has approved the voluntary delisting of all six series of preferred stock and two series of subordinated notes (AFST and AFSS) from the New York Stock Exchange.
This is what our small world of fixed-rate preferred stocks looks like at the start of February, just after the Federal Funds Rate decision announcement last Wednesday (January 30, 2019) after the two-day meeting.
After the New Year's rally, I am not finding that many bargains at the moment. I have covered almost all of my long holdings and personally, I'm waiting for better entry opportunities. Still, there is one REIT preferred stock you might consider buy: CIO-A, a stock that is still at the lows at this enormous V-shaped recovery in fixed income.
Note: This article was originally published on Feb. 4, 2019, and some figures and charts may not be entirely up to date.
Trade With Beta
The Trade With Beta team has been submerged in the universe of preferred stocks and baby bonds for almost a decade, and we decided to share our knowledge and expertise through the inception of this service. We attempt to cover all aspects of these products, from IPOs to pair trades and portfolio picks and, last but not least, issues. Additionally, once a month we go through all different groups of fixed-income instruments to make sure that nothing has gone unnoticed.
This article was written by
Day trader whose strategy is based on arbitrages in preferred stocks and closed-end funds. I have been trading the markets since I started my education in Finance. My professional trading career started right before the big financial crisis of 2008-2009 and I clearly understand what are the risks the average investor faces. Being a very competitive trader I have always worked hard on improving my research and knowledge. All my bets are heavily leveraged(up to 25 times) so there is very little room for mistakes. Through the years my approach has been constantly changing. I started as a pure day trader. Later I added pair trades. At the moment most of my profits come from leveraging my fixed income picks. I find myself somewhere in between a trader and an investor. I am always invested in the markets but constantly replace my normally valued constituents with undervalued ones. This approach is similar to rebalancing your portfolio and I just do this any time there is some better value in the markets. I separate my trading results from my trading/investment results. I target 40% ROE on my investment account and since inception in 2015, I am very close to this target.
My main activity is running a group of traders. Currently, I have around 40 traders on my team. We share our research and make sure not to miss anything. If there is something going on in the markets it is impossible not to participate somehow. Some of my traders are involved in writing the articles in SA. As such Ilia Iliev is writing all fixed-income IPO articles. This is part of their development as successful traders.
My thoughts about the market in general:
*If it is on the exchange it is overvalued and our job is to find the least overvalued.
*Never trust gurus - they are clueless.
*Work hard - this is the only way to convince yourself you deserve success.
*If you take the risk it is you who has to do the research.
*High yield is always too expensive.
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Analyst’s Disclosure: I am/we are long CIO.PA. 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.
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