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Issue 115


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by Doug K. Le Du


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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 4.4 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 892 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 892, 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 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). And 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.

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New Preferred Stock IPO’s, September 2016


Nine new preferred stocks were introduced for the consideration of preferred stock investors during September. As the month came to an end, September’s nine new preferred stocks were offering an average current yield of 5.9 percent.

Persistent low rates have motivated issuers to bring 74 new preferred stocks to market this year. There are now 892 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 – CYORP from City Office REIT (CIO) - is still trading on the Over-The-Counter exchange (as of September 30). This is a temporary OTC trading symbol until this security moves to the NYSE, 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. CYORP will become CIO-A. ARHPF, also still trading on the OTC exchange, will become ACGLP.


Eight of the nine new issues are traditional preferred stocks while the remaining security – SOJB from energy provider Southern Company (SO) – is an Exchange-Traded Debt Security.

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).

September’s eight traditional preferred stocks are from a diversified field, with insurance, property REITs, banks and a business development company all entering the U.S. preferred stock market. Three of the new issues – ARHPF, AFSI-F and AHL-D - come from property and casualty insurers Arch Capital (ACGL), AmTrust Financial (AFSI) and Aspen Insurance Holdings (AHL), respectively.

City Office REIT is a property REIT specializing in commercial office buildings. CIO’s September issue (trading on the OTC exchange as CYORP as described earlier) is the company’s first foray into the preferred stock marketplace since its founding in 2013.

Monmouth (MNR) is also a property REIT, owning and leasing industrial space. September’s MNR-C, issued at 6.125 percent, allowed the company to redeem the outstanding shares of MNR-A for October 14. Even though the A shares were costing Monmouth 7.625 percent, there were only 1.15 million A shares issued back in 2006 compared to 5.4 million shares of the new C series. Don’t be surprised if the company’s B shares, with a coupon of 7.875 percent, are redeemed next June when they reach their call date.

Customers Bancorp (CUBI) and Associated Banc-Corp (ASB) are both regional banks. CUBI’s CUBI-F is the company’s third preferred stock issue this year while ASB-D is the second new issue for Associated Banc-Corp since June of 2015.

Rounding out September’s new issues is GAINM from business development company Gladstone Investment Corporation (GAIN), offering an unrated, but cumulative, 6.25 percent coupon.

(Sources: Prospectuses MNR-C, ASB-D, CUBI-F, SOJB, AHL-D, GAINM, AFSI-F, ARHPF, CYORP. 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 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 Associated Banc-Corp’s ASB-D, Customers Bancorp’s CUBI-F, Aspen Insurance’s AHL-D, AmTrust’s AFSI-F and Arch Capital’s ARHPF are a distribution of these companies’ 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 September issues stack up within the context of today’s preferred stock marketplace?

During early September we saw the largest dip in preferred stock market prices since last February, as market participants anticipated a rate increase from the Fed’s September meeting. Once again, however, the Fed kicked the can, and prices moved upward, recovering much of the dip.

The average market price of U.S.-traded preferred stocks has increased by $1.47 per share this year, providing an annualized value gain of 8.0 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 6.4 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.6 percent and that of the 2-year bank CD is a meager 1.4 percent (currently, tying up your money for an extra eight years in a 10-year treasury only gets you 0.2 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 nine new September preferreds on September 30. It is into this marketplace that September’s nine new issues were introduced.

Income versus Value Investing, Year-To-Date

With an average current yield of 6.4 percent, plus the 8.0 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 14.4 percent (6.4 percent of which is realized in dividend cash).

For the second consecutive month, those investing in common stocks, as measured by the S&P500, saw flat returns during September. Starting at 2013 at the beginning of the year, this common stock value index closed on September 30 at 2168, an unrealized annualized value gain of about 10.3 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 12.3 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.