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COVID-19 Driving New Preferred Stock Buying Strategy

May 03, 2020 11:24 AM ET34 Comments


  • COVID-19 has delivered some of the best prices for high-quality preferred stocks that we have seen in several years.
  • 122 high-quality preferred stocks (investment grade, cumulative dividends) are now selling for an average price of $25.43, offering an average current yield of 6.3 percent.
  • 28 of these high-quality preferred stocks are priced below their $25 par value, selling for an average price of $24.07 and offering an average current yield of 5.8 percent.
  • Overall, U.S.-traded preferred stocks are now returning an average current yield of 7.5 percent.
  • With the cost of money so volatile throughout April, no new preferred stock were issued during the month.

With rates currently bouncing around, underwriters are unable to accurately assess market demand. And for their part, investors are having a hard time assessing risk as businesses have had to idle much of their activity due to COVID-19. When demand for a new income security is unknown and risk is harder to assess, prices fall and the reward side (yields) goes up.

So here we are…no new preferred stocks were issued during April, but with 28 high-quality income securities trading below their $25 par value, who cares? We’re in a market paying higher income for some of the best prices we have seen in years.

By high-quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings and cumulative dividends.

The primary reason many buyers prefer newly issued preferred stocks during a period of high prices (e.g. the last several years with very few exceptions) is that they can frequently buy shares on the wholesale Over-The-Counter stock exchange at introduction below the security’s $25 par value. But during a period of lower prices (now), dozens of high-quality issues become available for sub-$25 prices, eroding the attraction of new issues.

But what about the risk? While prices currently favor buyers, assessing the risk associated with any given preferred stock can be tricky, especially since many very attractive preferred stocks are unrated. One approach for assessing risk is described in my article “How to Rate an Unrated Preferred Stock” that may be helpful.

Of the 906 income securities trading on U.S. stock exchanges (including convertible preferred stocks), there are currently 122 high-quality preferred stocks selling for an average price of $25.43 (April 30), offering an average current yield of 6.3 percent.

Today’s COVID-fueled U.S. preferred stock marketplace

The following chart illustrates the average market

This article was written by

Whether you are the kind of investor who sticks with preferred stocks with a CDx3 Compliance Score rated 10 out of 10, or whether your portfolio has room for 9-score-and-lower securities, stay tuned for future articles recapping new IPOs and interesting preferred stock activity that we notice here at the CDx3 Notification Service.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The CDx3 Notification Service is my preferred stock email alert and research newsletter service and includes the database of all preferred stocks and Exchange-Traded Debt securities used for this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (34)

Thanks for this and many other great articles. Does your subscription database allow one to sort on when rate resets happen?
Hard to believe the preferreds would have crashed as bad as the overall market.. but going forward I find it hard to imagine some banks and utilities going bust..
BAC-N Bank of America.... NEE-I Next Era Energy.. ALL-I Allstate Ins
Land-P Gladstone..farmland reit … Met-A Metlife… are my best hopes..
gman1253 profile picture
Staying away from banks as there will be a ton of bankruptcies coming. Why take the risk?
Bob-in-DE profile picture
You're about a month late with this.
Bilbozark profile picture
Who ya gonna sell your overweight positions to?
theWayissimple1111 profile picture
The usual upgrade hustle that has become commonplace here on SA...worse than useless.
Pointless article.

It is utterly useless to say " there are currently 122 high-quality preferred stocks selling for an average price of $25.43 (April 30), offering an average current yield of 6.3 percent." and not provide the list of the so called issues you refer to
Your comment is on point!!!
Actually, Doug does provide such a list for subscribers of his CDX3 Investors web site.
I agree with your point about the article, but you can get that info for free from the "I Prefer Income" website which has pretty good functionality.
Patrick 1948 profile picture
The problem with all preferred is there is not enough liquidity. When a major event happens you can not sell out of your position. Now many of these have recovered from the extreme selling of March but liquidity is everything. After ten years of serious preferred investing I have moved to the sideline. If I want dividends I can get 4 per cent or so with liquidity. The extra two per cent is not worth it.
David.options.2021 profile picture
I have not found that to be true. I usually buy 800 to 1000 shares and except for a few exceptions never have an issue buying or selling.
rfschlegel profile picture
@Patrick 1948 On balance, I think you are correct re. liquidity. Very often low trading volumes, and (relatively) huge bid/ask spreads. But most of us using preferreds, I think, are income investors, not traders --- certainly we worry about safety, but usually liquidity is only a secondary consideration. I was very happy to hold a number of issues acquired in 2009 until they were called --- some had very low liquidity, but were purchased at deep discounts and paid extremely well. Only wish I had had more uncommitted cash during this pandemic downturn!
USC Heisman winner profile picture
Really big fan of yours but what happened to your article? Always look forward to excellent summary of prior month's preferred stock environment.

Hope you are doing well and look forward to a more comprehensive article in early June.

Stay safe and healthy!!
smurf profile picture
For the best research and complete listings I've found on preferreds and also baby bonds, www.innovativeincomeinvestor.com.
No list of securities
If you're asking for a list, you'll have to do your own research. There are a lot of tools and screeners out there.

But you're looking for companies with strong balance sheets and top credit ratings whose type of business is not much impacted by the current problems. The largest banks, the top re-insurance companies, the better utilities should be on your list.
Very helpful seeing the entire universe! Thanks!
rfschlegel profile picture
Thank you Doug --- as you say, with so many issues selling below $25, who cares about new issues? Only wish I had more cash to deploy.
Philipsonh profile picture
I enjoy the author's articles, but unless a list is provided, or a link to a list, this article is not helpful. Thanks.
i had a similar question, i.e. what is a source for a lidt of investment grade preferreds?
rfschlegel profile picture
Doug does link to his service, which he provides for a fee. Especially if you're new to preferred investing, it's well worth the cost.
caperdory profile picture
Doug is kinda thrifty with handing out free information...
DivvySam profile picture
IMHO Non-Cumulative Preferreds are too risky at this time considering that many of the financial companies who issue Non-Cumulative Preferreds have suspended or cut dividends in their past...I have moved out of most of my Non-Cumulative Preferreds...
The exception to your point, IMHO, is bank preferreds. To qualify as capital under US bank regulatory capital requirements, bank issued preferreds need to be non-cummulative. Banks are one of the largest issuers of preferreds (this is because of the favorable capital treatment which banks receive if the preferred meets the regulatory capital requirements; i.e.: non-cummulative). And many bank issued preferreds are rated investment grade.
@David California - I would stick to the very best banks, which is not that many. Some regional banks might get in trouble if COVID affects their business. Mega-banks like JPM, WFC, and BAC offer good preferreds. The interest rates are not that high, but you'll get your money.
Read JPM Jamie Dimon's comments from Q1 conference call. He lays out unemployment & GDP loss metrics for suspending dividends. Already setting aside billions for loan write offs. In an election year, we already have vocal House constituents calling for major banks to suspend all dividends to be a "team" player after 2009 blackeye banks received. Some banks might suspend dividends in part due to political sensitivities in concert with economic fallout.
How does one asses the risk of any given preferred stock suspending dividend payments given the dire current and near term future economic environment?
Nothing mentioned here every investor doesn't already realize.............
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