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Quick Summary

This month's High Quality Preferred Stocks article lists the six highest quality preferred stocks that are selling for a sub-$25 market price, offering income investors an average current yield of 6.4 percent. Out of the 917 preferred stocks and exchange-traded debt securities that were trading on U.S. stock exchanges at the end of October 2014, our preferred stock search engine found six specific high quality issues selling below their $25 par value. (jump to article)

The Preferred Stock News presents a snapshot of the U.S. preferred stock marketplace at the end of the third quarter and identifies four "maximum yield" preferreds. With the third quarter of 2014 now behind us, the number of investment grade preferred stocks selling for a market price below $25 is now at 71. While 71 candidates is much lower than the 167 we started the year with, it is still plenty for preferred stock buyers to pick from. (jump to article)

The Special Announcement article announces the availability of the 5th Edition of my book, Preferred Stock Investing. I update the book every other year with the most recent preferred stock research, focusing on the conditions that preferred stock investors are expected to be facing. Learn to screen, buy and sell the highest quality preferred stocks. (jump to article)

The Preferred Stock Facts article is presented both here and on the PreferredStockInvesting.com website. Test your knowledge by clicking on any preferred stock question to see the multiple-choice answers. You will receive an automatic email that provides you with the correct answer and my explanation. (jump to article)

The Free Special Offer article explains how you can now have continuing preferred stock research delivered to you for free. Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on my blog and make them available to you for free. (jump to article)

Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.

Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks

Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. The Fifth Edition is now available at your favorite online retailer.

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Investment Grade Preferred Stocks Available Below $25

71 investment grade preferred stocks are now available for less than their $25 par value

With the third quarter of 2014 now behind us, the number of investment grade preferred stocks selling for a market price below $25 is now at 71. While 71 candidates is much lower than the 167 we started the year with, it is still plenty for preferred stock buyers to pick from.

At the end of 2013, preferred stock investors were certain that as the Fed tapered out of its QE bond-buying program, interest rates would go up. After all, when the Fed launched QE with the objective of lowering rates, the program worked so it seemed reasonable that backing out of QE would have the opposite effect.

In anticipation of higher rates, the average market price of preferred stock shares fell to $23.05 as 2013 came to a close, pushing up the number of investment grade candidates that were selling below their par value ($25 in most cases) to 167.

The Preferred Stock Market, Q3/2014

As we now know, the expected rate increase did not materialize as the Fed exited their QE program. The price drop that we saw at the end of last year turned out to be short-lived. Predictably, average preferred stock prices are now about where they were a year or so ago at $25.16 per share.

The Preferred Stock Market Snapshot™ chart seen in Figure 3 depicts the preferred stock marketplace at the end of Q3/2014 (October 24, 2014) along with two characteristics that are usually high on the list of considerations for risk-averse preferred stock investors -- current market price (above and below these securities' $25 par value) and investment risk (as reflected by investment grade versus speculative grade Moody's ratings).

Each diamond represents a preferred stock. The sweet spot of the preferred stock marketplace is depicted in the green lower-left quadrant -- investment grade preferreds selling for a market price below their $25 par value.

While there are currently 917 preferred stocks trading on U.S. stock exchanges, 322 meet the criteria listed under the chart. The arrow in the table below the chart points to the migration that we have seen this year. As prices have increased this year, the percentage of the market occupied by investment grade securities that are priced below $25 has fallen to 22 percent, down from 47 percent at the end of 2013.

The Preferred Stock Market, Q3/2014

The purple diamonds on the chart identify the four preferred stocks that are offering the maximum current yield from each quadrant (not to be taken as recommendations): TDE, HSEA, MHO-A and GDP-C.

Figure 4 presents some of the details for these four "maximum yield" securities.

Note that for comparison purposes, I have selected Current Yield (CY) for the Yield column rather than Yield-To-Call (YTC) or Effective Annual Return (EAR) since two of these four securities have exceeded their call dates (YTC and EAR are not able to be calculated in those cases).

TDE is an Exchange-Traded Debt Security (ETDs) introduced by Telephone and Data Systems (NYSE:TDS) in November of 2010, becoming callable on November 15, 2015. TDE's Baa2 rating is two notches into Moody's investment grade rating scale. ETDs are very similar to preferred stocks and are often labeled as such, but they are actually bonds that trade on the stock exchange (rather than the bond market). ETDs offer cumulative dividends and are recorded on the company's books as debt rather than equity. As bonds, ETDs are generally seen as having less investment risk than the same company's preferred stocks. At 6.96 percent, TDE has the highest current yield of today's investment grade securities that are trading below their $25 par values.

HSEA is a trust preferred stock (TRUPS) introduced by Britain's largest bank, HSBC Holdings PLC (NYSE:HSBC), at 8.125 percent in April 2008 and has been callable since April 15, 2013. Note that HSEA offers Qualified Dividend Income (QDI) to individual investors (but not corporate investors since HSBC is a foreign company). As a TRUPS, HSEA provides cumulative dividends but today's buyers should be sure to read the prospectus of this security since the issuer, at their option and at any time, is able to convert these cumulative HSEA shares into non-cumulative "dollar preference shares." Today's buyers may also have to find a way to overlook the $1.92 billion fine that HSBC was required to pay in late-2012 for providing illegal banking services to the world's drug cartels (see "Bleak day for British banking as Libor arrests follow record fine for HSBC", The Guardian, December 11, 2012) and the bank's role in the LIBOR manipulation scandal more recently. Today's $26.24 market price exposes buyers to a $1.24 capital loss in the event of a redemption of HSEA shares.

MHO-A is a traditional preferred stock introduced in March 2007 at 9.75 percent by M/I Homes, Inc. (NYSE:MHO). M/I Homes was founded in 1973 and develops single family homes throughout the United States. At Caa1, MHO-A is well into Moody's speculative grade rating scale which explains the 9.57 percent current yield for this security. Shareholders were caught short during the summer of 2008 when the company suspended the dividends on these non-cumulative shares. Dividend payments were resumed in June 2013. Trading at $25.47, today's buyers are exposed to a $0.47 per share capital loss in the event of a redemption (MHO-A became callable on April 10, 2013).

GDP-C is a traditional preferred stock offering cumulative dividends and was introduced in April 2013 by Goodrich Petroleum (NYSE:GDP) at 10.0 percent. Its Caa2 rating is so low that this security is barely hanging onto the low end of the Moody's scale. The early-October plunge in global oil prices showed up quickly in the market prices for energy-related securities. GDP-C started October at $26.30 per share but dropped as low as $18.51 on October 13. The more risk-tolerant among us might consider GDP-C as a capital gain opportunity, assuming that those in charge of manipulating global oil prices are able to push prices back up. Note too that GDP-C is a QDI-designated security.

These four securities from four vastly different companies are offering the maximum current yields in the four key quadrants depicted by the Preferred Stock Market Snapshot™ chart.

SEC prospectus filings for TDE | HSEA | MHO-A | GDP-C

What's Next?

A strong retail sales report on September 11 pushed preferred stock prices lower for the second consecutive month -- the first two-month drop this year. The implication was that if retail sales are picking up, inflation cannot be far behind so the Fed will surely be bumping up rates any time now.

But when global oil prices fell during early October, speculators had the opposite reaction -- lower fuel costs drive prices down, which is sure to postpone any thoughts the Fed may have about raising rates.

Those reacting to such events are applying the short-term thinking of a value investor (buy low, sell high) to a long-term income investment (preferred stocks), which often creates buying opportunities for preferred stock investors who are paying attention.
 

More Preferred Stock Research

FROM DOUG K. LE DU

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