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JULY 2016

Issue 112


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Top Paying Investment Grade, Cumulative Preferreds



High quality preferred stocks continue to be in very high demand. The highest quality preferred stocks that are selling within one dividend of par are offering income investors an average 4.8 percent Yield-To-Call in today's preferred stock marketplace.

As rates move up and down over time, prices tend to move in the opposite direction, moving down and up, respectively. 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 within one dividend of 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 within one dividend of par

Purchasing shares close $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 close to (or below, when available) their par value, preferred stock investors are able to add a layer of principal protection to their investment.


Figure 1 shows the complete filter used to find these gems. Of the twenty parameters that can be set, the four arrows highlight the keys for this search. Setting the "Today's price, at most" parameter to "25.45" does the magic here.


In addition to finding the highest quality issues that offer cumulative dividends and are currently trading within one dividend of 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 List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.



There were a total of 901 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 901, these are the top highest quality issues that are trading within one dividend of their $25 par value. This list is sorted by last price with the lowest priced issues listed first.

The security shown in green font is an 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 within one dividend of their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's. The security listed at the bottom, paying a 7 percent coupon, is approaching its call date; expecting a redemption, the above-par market price of this security produces a negative YTC.

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New Preferred Stock IPO’s, June 2016


Preferred stock issuers continue to take advantage of our low rate environment and high demand for income securities. June was a big month for new preferred stocks, with thirteen new issues being introduced with an average current yield of 6.5 percent for the consideration of preferred stock investors. There are now 901 of these securities trading on U.S. stock exchanges.




Note that I am using IPO date here, rather than the date on which retail trading started. The IPO date is the date that the security’s underwriters purchased the new shares from the issuing company. Anxious to sell the new shares, underwriters will generally sell to broker/dealers using a temporary trading symbol on the wholesale Over-The-Counter exchange (who, in turn, sell them to us at retail within a few days of the IPO date).

Buying New Shares for Wholesale

Note that the two most recently introduced issues – GDVVP and NTTNP - are still trading on the Over-The-Counter exchange (as of June 30). These are temporary OTC trading symbols until these securities move to a big board exchange, at which time they will receive their permanent symbols. But there is no need to wait; during a period of high prices, individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see "Preferred Stock Buyers Change Tactics For Double-Digit Returns" for an explanation of how the OTC can be used to purchase shares for discounted prices during a period of high preferred stock prices).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC. GDVVP will become GDV-G and NTTNP will become NGHCN.


June’s preferred stock offerings are unique in several ways. First, eleven of the thirteen new issues are traditional preferred stocks with RZB from Reinsurance Group (RGA) and WALA from Western Alliance Bancorporation (WAL) being Exchange-Traded Debt Securities. ETDs are bonds and are recorded on the company’s books as debt rather than as equity, as in the case of preferred stocks. As debt, ETDs pay interest and, unless specified otherwise in the prospectus (which I have only seen once several years ago), are cumulative (meaning that in the event of a skipped dividend payment, the company still owes you the money; their obligation accumulates).

Beyond Western Alliance’s new ETD, WFC-X from Wells Fargo (WFC) was the only other bank-issued preferred during June. WFC-X is a large issue, its 40 million shares raising just under $1 billion. WFC-X’s dividends are non-cumulative, allowing the value of this security to be counted toward WFC’s Tier 1 regulatory reserves.

June’s offerings also included three new issues from property REITS –AMH-E from American Homes 4 Rent (AMH), their second new issue in as many months; INN-D from Summit Hotel Properties (INN); and PEB-D from Pebblebrook Hotel Trust (PEB). These latter two continue a trend that we have seen this year with new preferred offerings from hotel REITs.

Rounding out June’s new preferreds are KKR-B from KK&R (KKR) and ARES-A from Ares Management (ARES), both highly diversified limited partnerships investing in a variety of businesses; SSW-G from Seaspan (SSW), a shipping company headquartered in the Marshall Islands; MINDP from newcomer Micham Industries (MIND), which leases scientific equipment to geo-based industries; VR-A and RZB are from reinsurers Validus Holdings (VR) and Reinsurance Group, respectively; NTTNP (soon to be NGHCN) is from insurer National General Holding Company (NGHC). GDVVP (soon to be GDV-G) is a new closed-end fund offering from Gabelli.

Tax Treatment

Dividends paid by REIT preferred stocks are a pre-tax distribution of the company’s earnings to shareholders. As a pre-tax distribution, it is the shareholder who pays the full tax so dividends received from REITS do not qualified for any type of favorable tax treatment (although portions of REIT dividends are frequently re-classified at tax-time as capital gains, hence lowering your tax burden in that manner).

On the other hand, dividends received from the six new preferred stocks in the above table that have “QDI” in the Status column are a distribution of the company’s after-tax earnings and are therefore designated as being Qualified Dividend Income, although there are exceptions and conditions (see prospectus).

About the New Issues

Shortly after the housing collapse that began in 2008, a group of senior executives spun away from Public Storage and formed American Homes 4 Rent and, using the same capital raising strategy that they had become accustom to, issued three new preferred stocks – AMH-A, AMH-B and AMN-C. With the proceeds, AMH bought tens of thousands of distressed homes throughout the U.S. at bargain basement prices and turned them into rental properties. These three issues are unique in that their prospectuses include a provision that increases these securities’ $25 par value over time (the amount of the increases being published on the company’s website). In the event of a redemption, shareholders will actually receive more than the stated $25 par (see “American Homes 4 Rent Preferred Stocks, Opportunities And Risks”). Sadly, as with the May introduction of AMD-D, that par-inflating provision has been removed from the new AMD-E. Upon redemption, AMD-E shareholders will receive the stated par value of $25.

Reinsurance Group’s RZB offers fixed-to-floating dividends, meaning that this ETD pays interest at the indicated coupon rate (5.75 percent) until its call date (June 15, 2026) then, at that time, the interest rate becomes variable, resetting each quarter based on a formula as presented within this security’s prospectus. The current 5.75 percent coupon rate will be reset to the three-month LIBOR rate at the time (currently 0.63 percent) plus 4.04 percent. Variable rate preferreds usually also include a minimum rate provision, should the LIBOR fall through the floor (usually around 3 or 4 percent). Looking ahead to the possibility of a negative LIBOR, the prospectus of RZB sets that minimum rate at zero percent: “…will bear interest at an annual rate equal to the sum of three-month LIBOR, reset quarterly, plus 4.04%; provided that any such sum shall not be less than zero.”

Preferred stock investors should be aware that variable rate preferred stocks have rarely, if ever, benefited shareholders. While the notion that your dividend rate will go up with interest rates sounds great, the fact that the presumably upward adjustment in the rate is tied to the call date is no accident. Historically, if the dividend rate is going to adjust upward, the issuing company will usually redeem the shares in order to avoid the increase in dividend expense. Consequently, those purchasing fixed-rate preferred stock shares have earned about 180 percent more than those purchasing variable-rate preferreds during the same period (for historical data see “Variable-Rate Preferred Stocks Underperform Their Fixed-Rate Cousins”).

(Sources: Prospectuses ARES-A, RZB, MINDP, PEB-D, VR-A, WFC-X, SSW-G, WALA, KKR-B, INN-D, AMH-E, GDVVP, NTTNP. CDx3 Notification Service database,

In Context: The U.S. Preferred Stock Marketplace

So how do the new June issues stack up within the context of today’s preferred stock marketplace?

The Brexit vote provided another example where the forces that move common stocks are different from those that move preferred stocks. U.S. common stocks got clobbered for a couple of days following the vote due to uncertainty; but with a known return, preferred stocks offer far less uncertainty so U.S. preferred stock prices only fell by an average of $0.14 per share in response to the Brexit vote (since recovered and then some).

Demand for these securities remains very high.

Coupled with the limited success of the Fed’s efforts to increase the cost of money, the average market price of U.S.-traded preferred stocks has increased by $1.26 per share this year (an annualized value gain of 10.2 percent), including a $0.23 increase during June.



The data being charted here is limited to call-protected issues in order to limit the price distorting effect of an anticipated redemption.

Beyond ratings, many things affect the market prices of these securities such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer (think upstream oil producers), perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a “bang-for-your-buck” measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.

While the continuing strong demand for U.S. preferred stocks can be attributed to several factors, the next chart makes it pretty clear that the lack of attractive alternatives is certainly among them. U.S.-traded preferred stocks are currently returning an average current yield of 7.1 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.5 percent and that of the 2-year bank CD is a meager 1.4 percent.


It is into this marketplace that June’s thirteen new issues were introduced.

Income versus Value Investing, Year-To-Date

For comparison, I have set the Yield column in the first table above to show the current yield of the thirteen new June preferreds on June 30. With an average current yield of 7.1 percent, plus the 10.2 percent annualized YTD value gain, those investing in U.S.-traded preferred stocks since the beginning of 2016 are currently on pace for a total annualized return of 17.3 percent (7.1 percent of which is realized in dividend cash).

Those investing in common stocks, as measured by the S&P500, have not done as well this year. Starting at 2012.66, this common stock value index closed on June 30 at 2098.86, an unrealized annualized value gain of about 10.3 percent plus about two percent in average annualized dividend yield.










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Preferred Stock Investing, Fifth Edition

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 89 reviews posted at Amazon.

The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are currently facing.

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

The 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.