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Tim's Corner: Choosing The Right Preferred Stocks

Jan. 11, 2021 1:18 PM ET1 Comment
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Decades ago, George Orwell suggested that the best one-word description of a Fascist was “bully,”― Madeleine K. Albright, Fascism: A Warning

Image result for 50% offThis instablog post is sponsored by Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on Seeking Alpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service now nearly 10,000 active subscribers and can be had HERE for the rock bottom price of $49 (It usually is $99) for the first year. Tim provides a solid selection of lower beta, high yield recommendations for these challenging times.

Tolerance is a virtue, but tolerance coupled with passivity is a vice.”― Chris Hedges


By Tim Plaehn,

The early days of 2021 sure feel a lot different for investors compared to the first quarter of 2020. Last year we survived through a stock market crash that was especially hard on the different types of high-yield investments. At the time, I recommended great income opportunities to my Dividend Hunter subscribers on the cheap as investors bailed out of high yield investments, driven by unfounded fears.

Preferred stocks are one sector that has performed great for my subscribers. I started to recommend selected preferred stocks in March and April 2020. At that time, we acquired shares in the low to mid-teens. This period of low prices was remarkable since preferred stock prices rarely stray very far from the typical $25.00 par value. Here are a couple of examples,

I late March, I recommended buying New Residential Preferred A (NRZ.PA) at around $11.00 per share. The shares now trade at $24.50 and continue to pay the 7.5% coupon dividend rate.

I recommended buying the Brookfield Property REIT Preferred A (BPYUPP) when it was $15.00 to $16.00. These shares are now at $24.80 as I write this.

However, the days of picking up preferred stock shares at 30% to 40% discounts are now history. I am shifting my focus to the excellent, safe yields you can earn from preferred stocks.

Preferreds get their name from the fact that these types of shares have preference over common shares for dividend payments. Put another way, a company cannot pay common stock dividends unless it first pays the preferred dividends. Preferreds pay a fixed dividend based on a coupon rate and a par value, which in most cases is $25.00. For example, a preferred stock with a 6% coupon rate will pay a $0.375 per share dividend every quarter.

Income for Life? How to Get $6,851 Per Month Before Social Security, Pension or Any Other Retirement Source

Even though we can’t invest for big gains, I still recommend investing in select preferred stocks. Now the goal is a safe, stable, high yield income. The shift in goals has me looking at preferred stocks with different criteria in mind. Here is a short list I use when selecting preferred stocks to recommend to my Dividend Hunter subscribers:

  • A coupon rate of 7% or better. The largest preferred stock fund, the iShares Preferred and Income Securities ETF (PFF), yields less than 5%. I want my subscribers to earn more.
  • Acquire shares for less than the $25.00 par value. Most preferred shares are callable at par, so it wouldn’t make you too happy to pay $28 for some shares and then have them called away at $25.00.
  • Review the time until the first call date. Preferreds are issued with a period of years before they can be called. The current dividends are secure and protected until the first call date. At that time, shares can be called at par, and many preferreds go from fixed dividends to floating rates. Neither outcome (called or floating rate) is desirable.

To summarize. You want to find high yield preferreds not subject to losses if called away with secure dividends for at least three years.

Knowledge can never imprison you, but you can be captive to your ignorance.”― A.E. Samaan

Tim Plaehn of The Dividend Hunter has developed a monthly dividend calendar. It is yours free when you click here.

Thank You & Happy Hunting,

Bret Jensen

Founder, The Biotech Forum, The Busted IPO Forum & The Insiders Forum

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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