With interest rates falling, preferred investors have been finding it harder to avoid calls.
After a number of calls and sales, I've been left with three preferred holdings - Capstead Mortgage (CMO) Series E, Annaly Capital Management (NYSE:NLY) Series D, and Wells Fargo (WFC) Series L.
The one with the biggest call risk is NLY.PD, which pays 7.26% at its recent price of $25.76.
Since the quarterly payment is $0.4688, I found I would lose at least $0.30 a share if it were called at the next ex-dividend date, August 30. That's not a lot, but it's easily avoidable.
History Of Calls
Annaly has called four preferred issues in the last two years, including two this year. On May 1, Annaly announced a call of its 8.125% H series, and on June 21, it called its 7.625% C series. Fearing such a development, I had gotten out of NLY.PC in August 2018 at $25.77.
NLY.PD looks like it's next in line to be called. There are 16 million shares outstanding, so it most likely would be replaced by issuance of a fixed-to-floating preferred. It's impossible to know when a call might occur - it could be Friday, although the company's history suggests next spring.
Annaly Capital Management is a leading mortgage REIT. With a flattening yield curve compressing spreads, in May it reduced its common dividend to a $1 annualized level from $1.20, a warning sign.
However, as the chart below shows, preferred dividends make up only about one-tenth of the annual dividend expenditure of the company, the rest being common dividends. This offers a huge safety cushion, since preferred dividends must be paid before any common dividends.
The preferreds are unrated and do not qualify for preferential tax treatment, which explains why they yield more than rated preferreds from major
