Preferred stocks, sometimes called preference shares, are a hybrid investment. They’re a lot like a stock, but also a lot like a bond.
Shares trade on an exchange much like a stock. But the shares have a defined “par” value that the issuing company can buy them back at, much like a bond. Preferred stock dividends tend to be larger than that of common shares, and it’s a fixed, qualified dividend not subject to change like common stocks.
That means there’s less upside than a common stock, but there’s higher income than buying shares thanks to their guaranteed dividend payment. Many common stocks, even dividend stocks in their own right, also have preferred offerings.
Preferred shares can be bought by finding their specific ticker symbol, which tends to start with the same letters as the underlying stock. From there, it’s simply a question of the tending ticker symbol, which will indicate a preferred issuance, or part of a series of preferred issuances.
- The ONLY Way to Play Markets Like These
Warren Buffett said, "Price is what you pay... value is what you get."
The best investor in the world knows the only way to prosper (especially in markets like these)... is to invest in VALUE.
But this $2 stock could be the last value play in the market today.
With a large subsector of the investment world offering preferred shares, there are plenty of investment opportunities today, from preferred mutual funds to preferred stock ETFs. Funds and ETFs have the advantage of diversification, of course. But funds and ETFs can also give investors a way to research some of the top individual investments in the space as well.
Looking at the individual options out there, a plethora of attractive preferred shares exist today.
Preferred Stock #1: Capital One Financial Preferred I Series (COF-PI)
Credit card issuer Capital One Financial meets part of its liquidity needs with preferred shares. Among its offerings, the I Series looks attractive for a few reasons.
First, the preferred shares have a 5.4 percent dividend yield right now, or more than double the yield of Capital One’s common shares. And with a price of $23 against a par value of $25, there’s also room for some upside in shares as well. That’s good news for preferred shareholders. The upside isn’t huge, but it reflects the fact that the market expects the company to fare well.
During the panic selloff in stocks earlier in the year, these preferred shares dropped to $11, or just under half their par value. Investors who try to target these kinds of bargains may end up waiting for years to get those prices, if they’re lucky. A better strategy is to buy some now, and look to buy more on a market-driven credit fear.
Preferred Stock #2: Wells Fargo Preferred Q Series (WFC-PQ)
Wells Fargo has been the poorest-performing of the major banks in the past few years, thanks to a number of corporate scandals and now its exposure to the mortgage market.
But it’s not all bad news, at least on the preferred side. That’s because preferred shares for the bank trade near par, suggesting that even with all the trouble, the bank is fundamentally sound with a relatively low risk of bankruptcy.
The Q series preferred shares have a dividend yield 5.9 percent, near the higher end of bank preferred shares. And that payout is steady, unlike the common shares that just saw their annual dividend payments cut. While Wells may end up recovering in time and restoring its dividend, it’s certainly no longer on track to be a dividend aristocrat, and common stockholders will likely suffer for a while. For investors who need income now, the preferred shares are definitely the way to go.
Preferred Stock #3: U.S. Bancorp Preferred O Series (USB-PO)
As with many other financial companies, U.S. Bancorp also has a number of preferred shares. The O series looks like the most attractive. Trading right around the par value of $25, there may not be much in the way of capital appreciation right now. But a 5.1 percent dividend yield offers steady income that beats the pants off of bonds.
And while the preferred shares trade at par value, reflecting a belief by bond traders as to the bank’s solvency, common shares of the bank are down 33 percent in the past year and common shareholders lost over 66 percent peak-to-trough during the market selloff. While the common shares now yield 4.2 percent, it may take years for the bank’s common shares to recover.
That’s why the preferred shares, even at par value, look attractive for today’s preferred stockholders. And on another round of credit rating fears, there will be a chance to buy more preferred shares well below par value again.
Preferred Stock #4: Crown Castle International Convertible Preferred A Shares (CCI-PA)
Unlike most preferreds with a par value of $25 per share, these have a par value of $1,000 per share and can be converted to common stock. And with a yield at par of 6.875 percent, they’re a sizeable preferred dividend play. After August 1st, 2020, these preferreds will be eligible to be exchanged for shares, and the company may exercise the right to do so.
Given the stellar performance of the common shares, the preferred shares trade at a substantial premium to their par value, with a price near $1,480 per share. Even more interestingly, even with the market selloff back in March that took many preferred names below their par value, shares of the Crown Castle Preferred never dipped below $1,000.
The high price on the preferred has pushed the yield down to just 4.6 percent for now, but that’s still well above the current yield on common shares of 2.6 percent. And as a stealth way to get into one of the top real estate plays of the next few years, this isn’t a bad place for income investors to start, as there’s no guarantee as to when the preferreds will be exercised and exchanged for common stock.
Preferred Stock #5: National General Holdings Co. Preferreds (NGHCO)
Trading just above its par value of $25 right now, this preferred holding for an insurance company sports a 7.4 percent yield. The insurance industry can be a steady player, as policies are regulated at the state level and there’s a built-in profitability for the insurers, much like utility companies.
Meanwhile, the underlying company, National General, is expected to be acquired by Allstate for $4 billion. While the deal looks likely to go through, judging by the surge in common shares, investors who buy shares of this preferred stock now can still lock in a solid yield.
Typically, preferred shares in a merger continue going, albeit under a different ticker. However, as the preferred shares are past their call date of July 2019, this callable preferred stock may be retired as well, making this investment potentially profitable, but one that may also end up being cashed out by the end of the year.
Preferred Stock #6: Broadcom Convertible Series A (AVGOP)
Another preferred stock that’s also convertible to common shares, these shares will be eligible for conversion in September 2022.
Also having a par value of $1,000 per share, these preferreds have a starting yield of 8 percent. And, as with the CCI preferreds, the convertibility factor means that these preferreds trade above their par value in reflection of the move in the common stock. They’re much more reasonable at about $1,130 right now.
The current price on the preferreds has pushed the yield down to 7.1 percent, still a great return relative to the risk involved. And the convertibility of these preferreds means that shares should be worth more than par value by 2022. Of course, in any market selloff, these preferred shares will drop to reflect the value of common shares of Broadcom, so there may be an opportunity to buy at higher dividend yields in the future… although a 7.1 percent starting yield is nothing to complain about.
Preferred Stock #7: Duke Energy Corporation Preferred A Series (DUK-PA)
The debt-heavy utility space is also a key source of preferred shares for investors. And with the steady, regulated returns of the industry, it’s a popular place for steady income as well.
One such preferred trade is the Duke energy Corporation Preferred A Series. With a par value of $25, shares of this preferred currently trade for around $27.50, reflecting the safety of the utility space right now, and that of Duke Energy as one of the key players in the sector as well.
Even with that high price above the par value, the preferreds still yield 5.2 percent at present. That’s a bit higher than the 4.7 percent yield on Duke’s common shares, but investors are giving up any share upside from here. In fact, were these preferreds “called” today, any recent buyers would see a loss given the price above par value.
We think this is a preferred that should be on any investor’s watchlist, and that investors who have the patience to buy below par value of $25 won’t be disappointed, even if the preferreds are never called.
Is Preferred Stock a Good Investment?
That depends on what your investment objective is. Because preferred shares have a par value, they essentially have a maximum price that the issuing company is willing to pay for them, usually $25. So there’s a maximum upside. And unlike a common shares, there’s no chance for dividend growth.
The flip side, however, is that preferred shares pay a higher dividend than the common stock. So for income investors who want a less volatile play on an asset class, preferred shares may just be the way to go. And a few even pay monthly dividends!
What is the Downside of Preferred Stock?
There’s far less downside to preferred shares than common shares. In bankruptcy, common shareholders will only get assets after all bondholders and preferred holders have been paid off. In the event a company does appear to go bankrupt, the preferred share will also tend to drop, although preferred shares tend to fall less on a percentage basis than common shares.
Dividends also tend to be fixed, whereas over time, a common stock dividend could rise as the company’s operations improve. And interest rate risk can sometimes lead to drops in the space as a whole. Still, overall, there’s a lot to like as preferred stock holder.
Can Preferred Stock Lose Value?
Absolutely! Preferred shares of bank stocks can be particularly vulnerable during periods of credit market stress. That’s why it’s important to never pay over par value for a preferred share, and why preferred investors may want to target price levels below par that could provide some sizeable upside in addition to the income that these issues provide.
An investor can also diversify with a preferred ETF to prevent losing value. There are a number of preferred ETFs out there, and each ETF will list its top holdings and update them quarterly. Investors can use this to find individual names, or simply buy the ETF and get some diversification in the preferred space as a whole. A preferred ETF may also allow investors to get exposure to some of the convertible preferred stocks available without having to pay a high overall price to do so. Just bear in mind that a preferred ETF is not as diversified as a common stock index fund, and to mind the fund’s expense ratio.
Which Preferred Stock has the Highest Dividend?
As of this writing, the Ashford Hospitality Trust Series H preferred (AHT.H) is the highest yielding with a yield of 41.48 percent. But with shares of the trust preferred trading under $5 compared to a par value of $25, there’s a high chance of a dividend cut or suspension as the underlying REIT is going through some trouble. Even when a preferred stock’s yield has to be cut, a cumulative preferred stock has to eventually make all unpaid dividends in the future when it can.
Can I sell Preferred Shares Anytime?
You can trade preferred shares anytime the stock market is open, just like with a stock or ETF. There’s no need for end-of-day trading like with a mutual fund. Preferred share ETFs also allow for regular trading during any time the market is open.