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Issue 93


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by Doug K. Le Du


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See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.








Top 10 Investment Grade, Cumulative Preferreds Available Under $25



The ten highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.0 percent current yield in today's preferred stock marketplace.

As rates and prices move up and down over time, buyers buy when rates increase and prices fall below par ($25 per share in this case). Sellers sell those shares when rates fall again, pushing prices back above their original purchase price, enjoying seven percent (long-term average) dividends in the meantime.

This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.

Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find these gems. Of the nineteen parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


Figure 2 shows the results when this search is applied to our Preferred Stock ListTM database
(please note that to protect the values of subscriptions to the CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 6 of the December 2014 issue of the subscriber's newsletter, CDx3 Research Notes, that you received on November 29 for symbols.



There were a total of 921 preferred stocks and ETDs trading on U.S. stock exchanges as November 2014 came to a close. Of these 921, these are the top ten highest quality issues that are trading below their $25 par value (November 28, 2014 prices). This list is sorted by dividend rate (coupon) with the highest payers listed first.

The securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining securities listed are preferred stocks. All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's (the Moody's column).

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.

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Are Lower Tax Preferred Stock Dividends Really a Better Deal?



Preferred stock investors who acquire shares in a regular income account rather than a tax-deferred account such as an IRA, will often favor issues that are designated as qualifying for a lower tax treatment. Dividend income that qualifies for the more favorable tax rate is referred to as Qualified Dividend Income (QDI).

QDI qualification

The designation comes from the idea that if your dividends are paid to you out of the company’s after-tax profits, you get a tax break since the company has already paid corporate income tax on the money (the question of why you should have to be taxed on money that the issuing company has already paid tax on will forever remain a favorite political football).

Conversely, if your dividends are paid to you out of the company’s pre-tax revenue (such as in the case of preferreds issued by REITs), then your dividends are taxed at your regular income tax rate – you, rather the company, pay the full tax.

The tax break that you get for QDI-qualified preferred stock dividends depends on which tax bracket you fall into. This table shows the QDI tax rate for each federal income tax bracket.


(Source: Wikipedia,


Six to pick from

Of the 765 preferred stocks trading today (traditionals, trust and 3rd-party trust), 407 are designated as paying QDI dividends (53 percent). That’s the good news. The bad news is that most risk-averse preferred stock investors would probably avoid almost all of these.

Of the 407 QDI-designated preferreds trading today, only 211 offer cumulative dividends. And looking for those with an investment grade Moody’s rating drops the list down to 131. But even at that, 70 out of the remaining 131 are so old that they have become illiquid (daily volume is zero since there are no sellers); that leaves 61.

Most of these 61 were issued at a time when rates were higher than today, making redemption of the shares highly likely. Who wants to purchase shares and have the issuing company call them the next day? If you are looking for call protection of at least a year (to avoid short-term capital gain treatment), you’re actually down to eight preferred stocks, six of which have the $25 par value that most preferred stock investors favor (the other two have $1,000 and $100 par values and are aimed at institutional investors).

So here is the list of the six QDI-designated preferred stocks that offer cumulative dividends, investment grade ratings, a non-zero trading volume with at least one year of call protection and a $25 par value (sorted by Current Yield, highest to lowest).


Note that the highest QDI-designated payer is the new GRX-B at 5.875 percent. Just issued in September, GRX-B has yet to declare its first dividend but is expected to shortly.


(Source: CDx3 Notification Service database,


Compared to very similar non-QDI preferreds

Using the same criteria as a filter, here are the top six non-QDI preferreds with the highest current yield (November 25, 2014 prices).


For comparability, I sorted these lists by Current Yield here rather than Yield-To-Call or Effective Annual Return so the yield values indicate the annual dividend return (i.e. the shares are not sold within the first year so no capital gain/loss or reinvested dividend income is reflected in the yield values seen here).

Notice that while QDI-designated preferreds offer a lower tax rate than their non-QDI peers, they also pay less dividend income to begin with. In other words, the tax benefit offered by the six QDI-designated preferred stocks is at least partially offset by the lower dividend rate they offer when compared to very similar non-QDI preferreds.


So at what point is a preferred stock investor actually benefiting from the lower tax rate offered by QDI-designated preferred stocks?


The answer, of course, depends on which specific preferred stocks are being compared and which tax bracket you fall into. But let’s look at the QDI-designated preferred stock that offers the highest dividend income, GRX-B. As the highest QDI-designated payer, GRX-B has a coupon of 5.875 percent.

With a $25 par value, GRX-B pays $1.46 per year in QDI dividend income ($25 times 5.875 percent). The 15 percent QDI tax is $0.22 per share, so your after-tax dividend income is $1.24 per year for every share of GRX-B that you own ($1.46 minus $0.22).

Running this calculation for each of the six non-QDI peers shows us the break-even point for GRX-B – the non-QDI dividend rate at which your after-tax income is the same as GRX-B’s $1.24.


Notice that all of the non-QDI peers are issued by REITs. Remember that, come tax time, a portion of your dividend income earned from REIT preferred stocks will be reclassified as capital gain income which is taxed at a lower rate than the 28 percent used here. Consequently, this analysis understates the after-tax income earned from the non-QDI peers shown here.

The break-even dividend rate, where you start to become better off by purchasing non-QDI shares rather than shares of the QDI-designated GRX-B, is 6.875 percent. The after-tax income earned from a 6.875 percent non-QDI preferred stock is the same as the after-tax income earned from the highest paying QDI-designated preferred stock, GRX-B, at 5.875 percent (assuming a 28 percent regular income tax bracket).

Put another way, while being QDI-qualified lowers the tax rate applied to your dividend income, the lower coupon rate that QDI-qualified preferred stocks offer can eliminate the tax savings when compared to similar non-QDI alternatives.

But that can actually be good news for preferred stock investors because that also means that restricting your choices to QDI-qualified preferred stocks may not be necessary. In fact, there are currently 21 non-QDI, call-protected preferred stocks offering cumulative dividends and investment grade Moody’s ratings with coupon rates greater than GRX-B’s 6.875 percent break-even point. The after-tax dividend income from any of these 21 non-QDI issues exceeds the after-tax dividend income received from GRX-B (the highest QDI payer).

These results will vary, of course, depending on how the math works out with the particular alternatives you may be considering. By increasing your investment risk (by including non-cumulative issues or those that do not offer investment grade ratings), your list of QDI-qualified candidates grows.

And this analysis does not consider the capital gain/loss/call protection/redemption risk that comes with purchasing shares for above-par prices since the extent to which any of those materialize is unknowable.

But this apples-to-apples comparison, or as close as I could get to it, indicates that favoring QDI-designated preferred stock for your regular income (non-IRA) account may not be delivering the after-tax benefit that you’ve been counting on.










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Preferred Stock Investing, Fifth Edition Now Shipping!

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with 78 reviews posted at Amazon.

A new edition of Preferred Stock Investing is published every other year in order to keep up with current market trends and research. The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are expected to face.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The new Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













Recent Preferred Stock Articles by Doug K. Le Du


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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.