As an income investor, I feel that it is very important to diversify my holdings and to build the portfolio on a strong foundation of securities that are relatively safe and have the ability to pay a reliable and sustainable distribution. Over the last 10 years I have slowly created a portfolio of income producing securities. Preferred stocks & ETD securities are a key part of the foundation from which I build upon. There are many risk levels within each asset class and type of investment that an investor can choose from. That includes preferred stocks and ETD securities. If an investor is looking to reduce his or her risk, one good place to start is by looking at the Moody's and S&P ratings to find "Investment Grade" securities.
This article will focus on reviewing several cumulative traditional preferred stocks with the highest yields that are currently available from the list of over 600 preferred stocks & ETD securities that I track in the I Prefer Income database. I will then review each company and the ratings assigned to their preferred stocks. I can then compare each using the Where's the Metrics analysis system that uses 5 important areas of analysis: earnings, payout ratios, debt ratios, credit rating and dividends.
The Rating Services
Moody's and S&P (Standard & Poor's) are 2 of the big 3 credit rating services in the U.S. They both originated over a 100 years ago; and in 1975, they were both identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S Securities and Exchange Commission. The rating services are used to rate stocks, bonds, preferred stocks and government agencies. They assign ratings on the basis of assessed risk and the borrower's ability to meet its financial commitments. The top tier of ratings is considered as Investment Grade ratings and have the following ratings starting with highest rating on the left.
Moody's Investor Services / Investment Grade Ratings
S&P Financial Service / Investment Grade Ratings
Please note that the ratings assigned to the securities in our list may not be correct. They can frequently change and I am not able to maintain the most current ratings. I obtain the ratings from Quantumonline and directly from S&P on a monthly basis. It is left to the investor to verify the rating from their own sources, including the 2 rating agencies. These ratings provide a good starting point and with the metrics we provide and other resources, the investor is better able to make investment decisions.
Introducing the highest yielding cumulative investment grade preferred stock now available in the marketplace
There are currently 245 Investment Grade rated securities in the I Prefer Income database. These include 83 ETD (baby bonds), 3 trust preferreds, 84 non-cum preferreds and 75 cumulative preferred stocks. This article identifies 11 cumulative preferred stocks issued by 7 companies. These 7 companies are all REITs from at least 3 different sectors. They have a market price below $25.25 and yields above 5.5%. They are rated "Investment Grade" by either Moody's or S&P. These 11 preferred stocks have an average yield of 5.9% versus the average for all cumulative preferred stocks of 5.6%.
I will provide an overall review of these companies by using the Where's the Metrics analysis system that uses 5 main metrics to help determine the overall financial health of the parent company and their ability to pay a reliable and sustainable distribution. If you have not read about the Where's the Metrics analysis system, please click on this link to review it. The purpose of this general review is not to give recommendations; but rather, to show areas of strengths and weaknesses from each company. From this review, readers will have a better understanding of the company and able to do further research if warranted.
The 5 metrics that are used to analyze these securities are listed below:
- Earnings - GAAP and Non-GAAP
- Payout ratios
- Debt Ratios
- Credit Ratings
- Dividend Metrics
The table below contains the 7 parent companies located in the gray rows. Directly under the parent company are their 11 cumulative preferred stocks. There are 26 columns of information, to include general information and financial metrics that are used to obtain a better idea of each of the company's overall financial health and ability to pay a reliable and sustainable distribution. Each of the 5 areas of metrics are displayed below within the blue rectangles.
(Click on image to enlarge)
When doing a general review, I am comparing the metrics of the parent company in all areas except credit ratings. My goal is to get a better idea of the overall financial health of the parent because they are responsible for maintaining and paying the distributions on the preferred stocks.
A quick look of the 7 parent companies in gray shows relatively good metric scores in all 5 areas of review - earnings, payout ratios, debt ratios, credit ratings and dividends. Time to do a review of each stock to obtain more information.
Review of each parent company
Digital Realty Trust, Inc (DLR) is a REIT that has built a global business by providing data center, colocation and interconnection strategies of more than 2,300 organizations across North America, Europe, Asia and Australia. They have one preferred stock in this table with a price of $25.15 and a yield of 5.8%. The call date is in the past so Y-T-C is negative.
Earnings are perfect with the last 5 years and 5 quarters as being profitable. Since AFFO is a better measurement for some metrics, the table below shows the comparison between EPS and AFFO.
(Table 1, DLR earnings comparison)
The comparison displays a huge difference between EPS and AFFO and show that DLR is easily covering the dividend.
Payout ratios: All 3 payout ratios are excellent. That includes payout for common stock and preferred dividends.
Debt ratios: Debt-to-EBITDA is high, but in line with the other 6 companies in the table. The other 2 ratios are fine.
Credit rating: DLR-G has an investment grade rating.
Dividend: DLR has paid an ever-increasing dividend since 2004. See table below to see their dividend starting at 1.00 and growing to over $4.00 on annual basis. The 10-year median yield and current yield are equal which appears to show that the market is pricing DLR in line with the median. The 3-year average yearly dividend growth is 7.6% which is the highest of the other companies in this list. And finally, they are a dividend diamond who has raised their dividend for 15 consecutive years. That is a very good record and shows that they have increasing AFFO that justifies paying higher dividends.
(Table 1a, DLR dividend history)
EPR Properties (EPR) is a triple net lease REIT company that acquires and owns a portfolio of 3 main sectors: entertainment, recreation and education. Their NOI breakdown is as follows:
(source: EPR website)
EPR has 1 cumulative preferred stock with a price of $24.30, yield of 5.9% and Y-T-C of 6.65%.
Earnings: GAAP earnings are a perfect 5 years and 5 quarters of profits. Like most REITS, they also report Non-GAAP earnings. Here is a table of the comparison between EPS and AFFO:
(Table 2, EPR earnings comparison)
The comparison shows that AFFO is much higher than EPS and provides good coverage for the dividend.
Payout ratios: All 3 payout ratios are very similar to DLR and show they can cover both common and preferred dividends.
Debt ratios: The 3 debt ratios are good. The interest coverage ratio is higher than DLR. Remember that you want to see a high interest coverage ratio above 1. The higher the ratio, the more earnings they have to cover the interest expense.
Credit rating: EPR-G is rated Baa3 / BB.
Dividend: EPR shows excellent dividend history (see table 2a) and ever-increasing dividends since 2010. There is a little spread between the current yield and the 10-year median yield, but they are also a designated dividend diamond with 9 consecutive years of ever increasing dividends.
(Table 2a, EPR dividend history)
Federal Realty Trust (FRT) is a REIT that owns, operates, and redevelops high-quality retail-based real estate in what they consider to be some of the country's best markets. Here is a map where they own property:
(Source: FRT website)FRT has one preferred stock (FRT-C) with a price of $24.20, a yield of 5.5% and Y-T-C of 6.4%.
Earnings: FRT joins the 2 previous companies with profits during every period of the last 5 years and 5 quarters. They also report Non-GAAP earnings of FFO (funds from operations) with the following comparison to EPS:
(Table 3, FRT earnings comparison)
The earnings look good and show they do earn enough to cover the common stock dividend.
Payout ratios: All 3 payout ratios are excellent and show they have the ability to cover both the common and preferred stock dividends.
Debt ratios: Debt ratios are good; and once again, the interest coverage ratio is higher than DLR and EPR.
Credit ratings: FRT-C has the best Moody's & S&P rating of all 11 preferred stocks.
Dividend: FRT has one of the best dividend records of all public companies. The table below shows an increasing dividend over the last 15 years, but that is only because we limit the table to the year 2004. If we had enough space, we could go back 51 years as that is the number of consecutive years they have increased their dividend. Thus, they are a dividend diamond with 51 years of consecutive increases! Dividend growth is 2.8%.
(Table 3a, FRT dividend history)
Hersha Hospitality Trust (HT) - Please note that, through comments, it was determined that HT preferreds are not rated. This was an error. Go ahead and read the info provided, but the ratings are wrong. Rich Hill
Hersha Hospitality Trust is a REIT in the hospitality sector. It owns and operates upscale, luxury and lifestyle hotels in urban gateway markets and coastal destinations. The Company own 48 hotels located in New York, Washington, DC, Boston, Philadelphia, Miami and select markets on the West Coast. One thing I found very interesting from reviewing the HT website is that they only have 46 employees.
HT has 2 preferred stocks (HT-C and HT-D) with prices of $23.33 and $24.51, yields of 7% and Y-T-C of 2.6% and 10.17%.
Earnings: HT has not been as successful on GAAP earnings as the other companies. They report 4 years of profits out of 5 and only 1 out of 5 quarters of profits. However, lets check out the table of EPS vs AFFO earnings:
(Table 4, HT earnings comparison)
Even though their GAAP earnings show losses, the Non-GAAP earnings of AFFO (adjusted funds from operations) are more than enough to cover the common stock dividend. In fact, they show the best payout ratio of all companies in this list with .50.
Payout ratios: The 3 payout ratios look good and provide good coverage for both common and preferreds stock dividends.
Debt ratios: The debt ratios are an area where HT is weaker than most of the other 6 companies. The interest coverage score is under 1 and the debt-to-EBITDA ratio is high at over 7%.
Credit rating: (This was error) Not investment grade. Rich Hill
Dividend: HT has been paying dividends for years, but they do not have as good of a record as the 3 previous companies. The dividend has been higher since 2010 and stable since 2015; thus the dividend growth rate of 0 for the last 3 years. One thing that is interesting is the spread between current (forward) yield and the 10-year median yield. That spread suggests that the common would need to rise to reduce the yield back to the 10-year median yield. The last dividend metric is dividend diamond. Since they have not been raising their dividends, they do not earn that designation.
(Table 4a, HT dividend history)
Kimco Realty Corporation (KIM) is another REIT. It claims to be North America's largest publicly traded owners and operators of open-air shopping centers. As of March 31, 2019, the company owns interests in 430 U.S. shopping centers and has been in business for more than 60 years. They have 3 cumulative preferred stocks in this table with prices ranging from $23.39 to $24.80, yields of 5.6% to 5.7% and Y-T-C of 1.19% to 7.36%.
Earnings: KIM has earnings of 5 years and 5 quarters of profits. They also report FFO earnings. The comparison between EPS and FFO is shown in table 5.
(Table 5, KIM earnings comparison)
This comparison shows excellent FFO earnings and do provide good coverage of the common stock dividends.
Payout ratios: All 3 payout ratios do show excellent coverage for both common and preferred stock dividends.
Debt ratios: KIM has good debt ratios; and in line with the other REITs in the table.
Credit rating: KIM's 3 preferred stocks are rated Baa2 / BBB-
Dividends: KIM has paid a continuous dividend for years. They stumbled a bit in 2009 and 2010, but have then increased the dividend every year since then resulting in them designated as a dividend diamond with 8 consecutive years of ever-increasing dividends. They also have a dividend growth rate of 2.6%. The spread between the 10-year median yield and the current or forward yield is very wide. It suggests that the market is concerned about the future for KIM. This is probably referring to the Amazon effect and worry that brick and mortar businesses are in danger. Most of the concern has to do with malls. Since KIM owns shopping centers (not malls) and has been very pro-active in making changes as needed, some of that concern may not be warranted.
(Table 5a, KIM dividend history)
National Retail Properties Inc. (NNN) is a REIT that owns and operates over 2,900 retail properties in 48 states on a long term triple lease program. They have 1 preferred stock (NNN-E) in this article with a price of $24.94, a yield of 5.7% and a Y-T-C of .5%.
Earnings: Like most of the other REITs in this article, NNN has a perfect record of 5 years and 5 quarters of profits. They also report AFFO. Table 6 shows the comparison between EPS and AFFO.
(Table 6, NNN, earnings comparison)
The AFFO earnings are much higher than EPS and show their ability to pay the common stock dividend with room to spare.
Payout ratio: Because of the excellent earnings, they report 3 terrific payout ratios. Therefore, they have ability to pay the common and preferred stock dividends.
Debt ratios: The 3 debt ratios are the best of all companies in the article.
Credit rating: NNN-E has an investment grade rating of Baa2 / BBB-.
Dividends: NNN has a great dividend record. They have increased their dividend for 29 consecutive years resulting in the designation of being a dividend diamond. Table 6a shows the history since 2004. The 3-year average yearly dividend growth rate is 4.5%. And finally, the spread between the forward yield and 10-year median yield suggests that the common stock may be higher than the median, resulting in a low comparative yield.
(Table 6a, NNN dividend history)
Vornado Realty Trust (VNO) is a REIT that owns and manages office and retail assets in New York, Chicago and San Francisco. They have 2 cumulative preferred stocks with prices of $23.68 and $25.17, yields of 5.5% to 5.7% and Y-T-C of -.21 and 6.95%.
Earnings: VNO has been profitable 5 out of the last 5 years and 4 out of the last 5 quarters. Like most of the others in this article, they also report AFFO. The comparison between EPS and AFFO is displayed in table 7.
(Table 7, VNO earnings comparison)
The AFFO earnings are well above the EPS and result in excellent coverage for the common stock dividend.
Payout ratios: All 3 payout ratios are excellent and provide excellent coverage for both common and preferred stock dividends.
Debt ratios: The one debt ratio that concerns me is debt-to-EBTDA of 7.7%. That is the highest of all 7 companies in this article. Debt-to-equity is also the highest of all the 7 companies in this article.
Credit ratings: The ratings are investment grade.
Dividends: Over the last 15 years, VNO has paid a dividend in all years, but skipped 2011. They resumed in 2012 with somewhat mixed results. Table 7a shows the dividend history.
(Table 7a, VNO dividend history)
In spite of skipping dividends in 2011, they do have a good payout ratio and a 3-year average yearly dividend grow rate of 1.6%.
The purpose of this article was to introduce the highest yielding cumulative preferred stocks that have "investment grade ratings" in the marketplace. The 11 preferred stocks that are included in this article are from 7 parent companies and have prices below $25.25. I did a general review using the Where's the Metrics analysis system that analyzes earnings, payout ratios, debt ratios, credit ratings and dividend metrics. The interesting thing is that the companies whose preferreds stocks met this criteria are all real estate investment trusts (REIT). This may mean that the marketplace is generally undervaluing REITs.
The review was relatively positive for all 7 parent companies as 5 of 7 have perfect GAAP earnings records. All have excellent payout ratios for both common and preferred stock dividends. They also have fair debt ratios except for VNO whose debt ratios are generally worse than the other 6. They of course have investment grade ratings and most have excellent dividend metrics to include 5 of the 7 being designated dividend diamonds. I did identify a couple areas of concern that should be researched further.
I hope this article has brought attention to these 11 investment grade preferred stocks and that you may have discovered 1 or more gems that warrant further research. Is it time to add more income producing securities to your portfolio?
Thanks for reading.
Disclosure: I am/we are long EPR.PG. 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.
Additional disclosure: This article was written for informational purposes and is not intended as recommends or as personal investment advice. Please practice due diligence before investing in any security mentioned in this article.