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Issue 116


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by Doug K. Le Du


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See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.








Top Paying Investment Grade, Cumulative Preferreds Available Under $25



It's time for preferred stock buyers to start paying attention. In anticipation of the Fed's December rate meeting, the market prices of U.S.-traded preferred stocks are finally coming down, dropping $0.50 per share since September 1 (see Figure 4). This is the first sustained drop in preferred stock prices since February.


As prices fall, your annual return increases since you are having to invest less of your money to get the same dividend income. The highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 5.4 percent Yield-To-Call in today's preferred stock marketplace.


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.


ETDs are very similar to preferred stocks but are actually bonds that trade on the stock exchange (rather than the bond market). As bonds, ETDs are generally seen as offering lower risk than the same company's preferred stocks.

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, with ETDs shown in green font (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 886 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 886, 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.

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, October 2016


The big news for preferred stock buyers is that market prices for U.S.-traded preferred stocks have finally started to fall for the first time since last February. As the December Fed meeting approaches, it is time for preferred stock buyers to start paying attention.

Eight new preferred stocks were introduced for the consideration of preferred stock investors during October. As the month came to an end, October’s eight new preferred stocks were offering an average current yield of 6.4 percent.

Persistent low rates have motivated issuers to bring 82 new preferred stocks to market this year. There are now 886 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 most recently introduced issue – PPLUP from People’s United Financial (PBCT) - is still trading on the Over-The-Counter exchange (as of October 31). This is a temporary OTC trading symbol until this security moves to the NGS, at which time it will receive its permanent symbol. 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. PPLUP will become PBCTP.


October’s eight traditional preferred stocks are from a diversified field with five property REITs, a mortgage REIT, a business investment company and a bank entering the U.S. preferred stock market.

Seven of the eight new issues offer cumulative dividends (if the company misses a dividend payment to you, they still owe you the money; their obligation to you accumulates). And the five property REITs represented in October’s offerings each specialize in a different type of real estate.

National Retail’s (NNN) F series was introduced at 5.2 percent. NNN-F is a $300 million offering, the company’s largest yet. Neither of the company’s other two preferreds are callable, so the proceeds from NNN-F are being used to pay off all of the company’s outstanding credit facility debt (this move converting debt into equity on the company’s books).

Bluerock Residential Growth (BRG) is a relative newcomer to the residential REIT space, founded in 2008. BRG-D, at 7.125 percent, is the company’s second offering in less than 90 days, its BRG-C being introduced in July at 7.625 percent.

Public Storage (PSA), the highest rated property REIT, took advantage of its A3/BBB+ ratings to issue PSA-E during October at a miserly 4.9 percent. PSA now has thirteen preferred stocks trading, four of which were introduced this year.

PS Business Parks (PSB), an office REIT, introduced its first new preferred stock since March 2013 with its PSB-W at 5.2 percent. None of PSB’s other four preferred stocks that are currently trading are redeemable so the bulk of the $165 million from this offering will go to pay down debt.

The last of October’s property REIT offerings is from Ashford Hospitality (AHT). Ashford is a property REIT specializing in hotels. October’s AHT-G raised about $150 million with a coupon of 7.375 percent. These proceeds will be much more than enough for the company to redeem all outstanding shares of their AHT-A (a $50 million issue at 8.550 percent that became callable in September 2009) and/or a partial redemption of AHT-D (a $200 million issue at 8.45 percent that became callable in July 2012).

CIM-A is from mortgage REIT Chimera Investment Corp. (CIM). This October issue is the company’s first preferred stock offering and is unrated, but cumulative, at 8 percent.

ECCB is from business investment company Eagle Point Credit Company (ECC). The company invests in collateralized loan obligations. ECCB is ECC’s third offering since May 2015 (two preferreds plus one Exchange-Traded Debt security). Both of the company’s preferreds, offered 17 months apart, offer 7.75 percent coupons.

Rounding out October’s new issues is PPLUP (soon to become PBCTP) from People’s United Financial. Founded in 1842, this is the company’s only preferred stock offering. Like almost all new bank-issued preferred stocks since 2010, PPLUP’s dividends are non-cumulative, allowing the bank to count the value of this issue toward its Tier 1 regulatory reserves. PPLUP’s dividend remains fixed at 5.625 percent for the next ten years, but then changes to equal the 3-month LIBOR rate (currently at 0.85789 percent) plus 4.02 percent.

(Sources: Prospectuses NNN-F, BRG-D, PSA-E, CIM-A, ECCB, PSB-W, AHT-G, PPLUP/PBCTP CDx3 Notification Service database,

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 qualify 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 People’s United Financial’s PPLUP are a distribution of the bank’s after-tax earnings and are therefore designated as being Qualified Dividend Income (“QDI” in the Status column of the above table), although there are exceptions and conditions (see prospectus).

In Context: The U.S. Preferred Stock Marketplace

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

Probably in anticipation of a December rate hike by the Federal Reserve, the average market price of U.S.-traded preferred stocks sustained the much-welcomed decline that actually began during early-September.

We saw a similar drop in late-2015 as the Fed was expected to start raising the federal funds rate in December of that year – which they did. In response, prices of income securities finally began trending back toward normal accordingly, but by mid-February 2016 it became obvious that whatever control the Fed had over domestic interest rates had been overstated. By mid-March of this year, the average market price of U.S.-traded preferred stocks had returned to where it was the previous fall ($24.75) and kept right on going, peaking in mid-August at $26.40 per share.

Since mid-August, the ongoing price reduction has boosted yields; a welcomed and long overdue trend for income investors. But for the year, the average market price of U.S.-traded preferred stocks closed October at $25.81, an increase of $1.22 per share this year, providing an annualized value gain of 6.0 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 6.5 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.9 percent and that of the 2-year bank CD is a meager 1.5 percent (currently, tying up your money for an extra eight years in a 10-year treasury only gets you 0.4 percent over a federally-insured bank CD).


For comparison, I have set the Yield column in the first table above to show the current yield of the eight new October preferreds on October 31. It is into this marketplace that October’s eight new issues were introduced.

Income versus Value Investing, Year-To-Date

With an average current yield of 6.5 percent, plus the 6.0 percent annualized 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 12.5 percent (6.0 percent of which is realized in dividend cash).

After a stagnant summer, those investing in common stocks, as measured by the S&P500, saw declining returns over the last two months. Starting at 2013 at the beginning of the year, this common stock value index closed on October 31 at 2126, an unrealized annualized value gain of about 6.7 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 8.7 percent for common stock investors.










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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 92 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.