Great Resources for Preferred Stock Investors!





MAY 2016

Issue 110


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by Doug K. Le Du


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Top Paying Investment Grade, Cumulative Preferreds Available Under $25



The highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 7.0 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 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 twenty 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 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 894 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 894, these are the top highest quality issues that are trading below their $25 par value. 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.

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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New Preferred Stock IPO’s, April 2016


April was a typical month for new preferred stocks, with six new issues being introduced for the consideration of preferred stock investors. There are now 894 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 who sell them to us within a few days of the IPO date.

The six new April issues are from a diverse group of industries including banks: STT-G from State Street (STT), BAC-A from Bank of America (BAC) and CUBBP from Customers Bancorp (CUBI), all three of which are designated as offering Qualified Dividend Income; a property REIT: UMH-B from UMH Properties (UMH); and two business development companies - TAXIL from Medallion Financial (TAXI) and NEWTL from Newtek (NEWT).

Note that Customers Bancorp’s CUBBP, introduced on April 21, is still listed on the Over-The-Counter exchange but on Friday, April 29 when this data was gathered, the volume was zero shares. CUBBP is a temporary OTC trading symbol until this security moves to the NYSE as CUBI-E, which appears to be imminent (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).

(Sources: Prospectuses STT-G, UMH-B, TAXIL, NEWTL, BAC-A , CUBBP . CDx3 Notification Service database,

About the New Issues

STT-G and CUBBP are offering fixed-to-floating dividends, meaning that they pay dividends at the indicated coupon rate until their respective call dates then, at that time, the dividend rate becomes variable, resetting each quarter based on a formula. In the case of STT-G, the current 5.350 percent coupon rate will be reset to the three-month LIBOR rate at the time plus 3.709 percent. CUBBP is more generous, adding 5.14 percent to the three-month LIBOR. But be careful to notice that CUBBP’s call date, when the new presumably glorious rate kicks in, is ten years from now compared to five years away for STT-G.

Having said that, 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”).

Medallion Financial is an interesting company facing an interesting challenge. Wading into the baby bond market, Medallion’s TAXIL is the company’s first Exchange-Traded Debt Security. Medallion’s primary business is the provision of financing to taxi companies. The “self-serve” or “gig” economy that smartphones have made possible, connecting consumers directly with suppliers, is just getting started (crowd-funding is another popular example, cutting out commercial lenders). Uber, Lyft and their competitors have beaten traditional taxi companies at their own game only because taxi companies became complacent; there was nothing stopping taxi companies from doing what Uber ultimately did. They are now paying the price for over-embracing the status quo. The extent to which this will impact Medallion will depend on how traditional taxi companies react over the long-term. But the implication is that they would be best served to figure out a way to participate, rather than resist, this new model (and a few already have).

Newtek’s NEWTL is also an ETDS, the second such offering by Newtek. What I notice most about NEWTL is its very short call and maturity dates. Issued on April 13, 2016, NEWTL has a call date of April 22, 2017 meaning that all buyers outside of the security’s underwriters are exposed to short-term capital gain treatment if the company redeems these shares next April. Also, while most ETDS are issued with a maturity date several decades into the future, NEWTL shares mature five years after issue on March 31, 2021. The shares are not rated (NR) by either Moody’s or S&P, so today’s buyers are left entirely to their own due diligence here.

In Context: The U.S. Preferred Stock Marketplace

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

U.S.-traded preferred stocks remain in very high demand. 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 $0.81 per share this year (an annualized value gain of 9.9 percent).



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 6.9 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.8 percent and that of the 2-year bank CD is a meager 1.5 percent.


It is into this marketplace that April’s six new issues were introduced.

For comparison, I have set the Yield column in the first table above to show the current yield of the six new April preferreds on April 29. With an average current yield of 6.9 percent, plus the 9.9 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 almost 17 percent (6.9 percent of which has been realized in dividend cash).

Those investing in common stocks, as measured by the S&P500, have also done well this year, seeing an unrealized annualized value appreciation of about 12.7 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 88 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.